Borrowing for a New Car vs. Paying Cash for a Used Car

This is a debate that’s been going on for as long as people have owned cars, do you buy a brand new car—with a brand new car loan—or pay cash for a used car? In the best of both worlds we can buy a new car, pay cash and not have a loan with its annoying monthly payments. But most of us either don’t have that kind of cash, or don’t feel comfortable tying up $20-40,000 in a car. For many it may boil down to the basic question, do I want a car payment(?) , but I think there’s more to it than that. There are a series of questions that need to be asked and settled before going one way or the other, and not all of them have to do with money. Here are just a few. How much do you drive your car? This may be the most underrated part of the new-car-vs-used-car debate. If you do a lot of driving you’ll lean in favor of a new car; if you tend to stay close to home a used car is typically a better option. A long daily commute, especially if it involves heavy stop-and-go traffic, cries out for a brand new car. So does a sales job that has you driving 30-40,000 miles per year. Not only will a new car stand up better to the daily grind, but that amount of driving requires a vehicle that won’t be spending too much time in a repair shop. On the other side of the coin, if you’re a retiree or a homemaker mostly driving local errands, a used car will get you where you’re going without a big monthly payment. Another group of people who can easily get by with an inexpensive used car are the work-at-home set. This is a rapidly growing group, and they have no commute and usually little business related travel. An inexpensive, loan-free car is one of the perks of working from home! How mechanically inclined are you? There’s no getting around the fact that used cars require more repairs than new ones, and that should have an impact on your decision. If you can do most of the routine maintenance for your car and handle many of the repairs, a used car is a good fit. If you know nothing about cars and have to rely on paying mechanics to do the work then a used car can be a money pit, and a new car will be the better fit. Repair Costs Versus Monthly Payments OK, so a used car will cost more for repairs than a new car—simple enough. But what about those car payments on the new car? That’s an annual expense just like repair costs are, even if it is broken down into neat, predictable payments. Let’s say you buy a new car for $25,000 and, after a $5,000 trade-in for your old car, you have a $20,000 loan at 5%, payable over five years—that’s about $377 per month for the payment. Now multiply that by 12 months, and you get an annual loan service cost of $4,524. Plus, even though the car is new, you’ll still have maintenance costs—oil changes, tune-ups, tires, etc—that will add at least $500 per year. With payments and routine maintenance, the new car is costing you over $5,000 per year. As a veteran used car owner I can say with some confidence that it costs, on average, about $1,500 to $2,000 for repairs and maintenance each year. In a bad year it can go over $3,000, but some years it’s below $1,000 so it averages out. Now it can be argued that new cars tend to be more fuel efficient than used cars, saving money on gasoline, but it’s equally true that new ones also cost more to insure . We probably have a wash on this part. Comparing $5,000 in annual expenses for payments and maintenance for a new car to roughly $2,000 in repairs for a used car, we see that not only does a new car have a higher price, but it also costs more to keep each year. How much cash do you have for a car? At least some of the choice to buy new versus used is determined by the amount of cash you have to buy a car with. The lack of cash is the reason people take loans to buy a car. It’s also the reason people often buy new cars—dealers offer sweetheart deals that can include cash rebates and very low interest financing. This is all the more attractive if you have little cash and not much trade-in value on your old car. If you do have cash sufficient to buy a good used car, you won’t need (or even want) to take a loan. How good are your personal money management skills? Some people are better at paying bills than they are at saving money—loans work for them! Large, unpredictable repair bills can be very disturbing when you aren’t a saver. New cars with loans are better if this is you. The loan is a forced savings plan because you’re building equity in the car over a period of years. Savers are actually better suited for used cars. You have to have more cash to purchase the vehicle (loans can be harder to come by on used cars) and you need to be able to budget for repairs before they happen. As you can see, new car/new loan or used car/no loan isn’t just a debate over the monthly payment. How often you use your car, how much you know about repairs and even how good you are with saving money are all factors that need to be considered. Are you facing this decision on buying a car? What factors are you considering in that decision? Leave a comment below! Related Articles: How do you pay off a car? Why Refinance A Car? To Save Money! How Do You Save Money for a Replacement Car? Should You Sell Your Car or Repair It? With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of OutOfYourRut.com , a website about careers, business ideas, money and more. A committed Christian, he lives in Atlanta with his wife and two teenage kids.

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