Buying new versus used

In short

A friend of mine once bought a new truck on a Saturday and felt sick about it by Tuesday. You can avoid that feeling by knowing where the money goes before you sign anything. A new car loses value fastest in its first few years, so the person who buys it pays for that drop. A used car has already taken much of that hit, and you pay less for the same trip to work. Set your budget by the total cost of owning the car, which includes the loan, insurance, fuel, and repairs. Ask your own bank or credit union for a loan quote before you walk into a dealership, so you have a number to compare. Then set the two choices side by side on paper, using your real numbers.

The whole of it

What it is

I once watched a neighbor spend an entire summer arguing with his brother over this very question. The truth is, neither of them was wrong. Buying new means you are the first owner of a car with no miles on it. Buying used means someone else drove it first, and you pay less because of that.

You have probably heard that a car loses value the moment you drive it off the lot. That saying is a little dramatic, but the idea behind it holds. The word for this loss is depreciation, which simply means the drop in what a thing is worth as it ages and gets used. It is often the biggest cost of owning a car, bigger than gas or repairs, and it is the one nobody sends you a bill for.

Both choices are honest ones. New cars come with a fresh warranty and the newest safety features. Used cars come with a lower price and, often, a lower insurance bill. What matters is which set of trade offs fits your life. You know your life better than any salesman does.

How it works

A story I heard from a mechanic in a small town goes like this. He said folks always ask about the sticker price, and almost nobody asks about the cost of keeping the car. That second number tells you far more.

Think of owning a car as five costs stacked together. The first is the price you pay, plus taxes and fees. The second is the interest on your loan, which is the fee a lender charges you for borrowing. The third is insurance. The fourth is fuel. The fifth is upkeep and repairs.

A new car tends to cost more on the first, second, and third. The price is higher, so the loan is bigger, so the interest is bigger. Insurers often charge more to cover a car that costs more to replace. On the fifth cost, a new car often wins early on, because parts are fresh and a factory warranty may cover big repairs.

A used car flips that picture. You pay less up front and borrow less. Repairs may come sooner, though, and you carry that risk yourself. A certified pre owned car sits in the middle. That means a used car that a dealer or maker has inspected and often backed with a limited warranty. Read the warranty terms yourself, because they differ from one seller to the next.

Loan length matters too. A longer loan lowers the monthly payment but raises the total interest you pay. It can also leave you owing more than the car is worth for a while. Watch that trap.

The numbers, and where to find yours

If you are holding a pen and a scrap of paper, good. You will need a few figures, and most of them are free to find.

Start with the interest rate on your loan. Your bank or credit union can give you a quote, and that quote is your best tool at the dealership. The Consumer Financial Protection Bureau, at consumerfinance.gov, has plain guides on auto loans and on how to compare offers. The Federal Trade Commission, at consumer.ftc.gov, explains your rights when buying a car, including what a used car dealer must post on the window in a document called the Buyers Guide.

For the value of a car, look up the price guides that dealers and lenders use, such as Kelley Blue Book or Edmunds. Enter the exact model, year, mileage, and condition. For a used car, a vehicle history report and an inspection by a mechanic you trust are worth their cost. You can check for open safety recalls for free on the National Highway Traffic Safety Administration site, nhtsa.gov, using the car's vehicle identification number.

For fuel costs, the Department of Energy runs fueleconomy.gov, where you can compare the yearly fuel cost of different models. For insurance, call your own agent and ask for quotes on the exact cars you are considering. That call is worth making before you buy, not after.

Some tax rules can also affect an electric or hybrid purchase, and those rules change. For any credit, the income cap, or the price cap, use the current numbers from the IRS. The maximum new clean vehicle credit is the current figure, which the official source publishes each year, and the used clean vehicle credit is the current figure, which the official source publishes each year. Confirm both on irs.gov before you count on either one.

A worked example

Let me tell you about a woman named Maria. She drives about 12,000 miles a year and wants a reliable small car. She has narrowed it to two choices.

The new car costs 28,000 dollars. The three year old version of the same model costs 20,000 dollars. Maria gets a quote from her credit union for both loans at 6 percent, over 5 years, with nothing down.

For the new car, a 28,000 dollar loan at 6 percent over 60 months has a monthly payment of about 541 dollars. Multiply 541 by 60 months and you get 32,460 dollars paid in total. Subtract the 28,000 dollars borrowed and the interest is about 4,460 dollars.

For the used car, a 20,000 dollar loan at the same rate and length has a payment of about 387 dollars. Multiply 387 by 60 and you get 23,220 dollars. Subtract the 20,000 dollars borrowed and the interest is about 3,220 dollars.

So over the loan, the new car costs 32,460 dollars and the used car costs 23,220 dollars. The gap is 32,460 minus 23,220, which is 9,240 dollars.

Now Maria adds the rest. Say her insurance quote is 1,600 dollars a year for the new car and 1,300 dollars for the used one. Over 5 years that is 8,000 dollars against 6,500 dollars, a gap of 1,500 dollars. She then sets aside 2,500 dollars over five years for repairs on the used car, and 500 dollars for the new one, because of the warranty. That is a gap of 2,000 dollars in the other direction.

Add it up. The used car is 9,240 plus 1,500 cheaper on the first two items, which is 10,740 dollars. Subtract the 2,000 dollar repair difference, and the used car still comes out ahead by 8,740 dollars. These are Maria's plain figures, so yours will differ. Run your own.

She still might choose the new car, and that would be fine. Maybe she wants the warranty and the peace of mind. Now she knows what that peace of mind costs.

Where it goes wrong

I have seen good people trip over the same few stones. The first is shopping by monthly payment alone. A salesman can hit almost any payment by stretching the loan, and you pay for it in interest.

The second is skipping the inspection on a used car. A car can look clean and hide a bad past. A history report and a mechanic's check cost little next to a surprise repair.

The third is taking the loan at the dealership without comparing it. You are allowed to say no. Bring your own quote and ask them to beat it.

The fourth is forgetting the add ons. Extended warranties, gap coverage, and paint protection all get offered in a small office at the end of a long day. Some may suit you. Ask what each one costs and what it covers, and read it before you agree.

The fifth is paying for more car than you need. It is easy to do. A car you can comfortably afford beats a car that keeps you up at night.

Questions to answer before you leave this page

What is the most I can spend each month on the car, insurance, and fuel together without feeling squeezed? Have I asked my bank or credit union for a loan quote, and do I know the rate I qualify for? Have I called my insurance agent for quotes on the exact cars I am considering? How long do I plan to keep this car, and does that change which choice makes sense? If I buy used, who will inspect it for me, and have I checked the history report and open recalls? If I buy new, do I understand what the warranty covers and for how long? And when I picture the total cost over five years instead of one monthly payment, does my choice still feel right?