Why You Should Buy a New Car Instead of a Used Car.

A lot of people have the mentality that buying a decent used car is dramatically cheaper than a new car, but is it really that much cheaper? Here are a few reasons why you should consider buying a new car over a used car.

For this article, lets assume you are contemplated buying a $10,000 used car versus a new $21,060 car. How did I come up with these numbers? Because I was in this exact situation. In Fact, the exact car I was considering was a used 2008 Honda CR-V with 137,000 miles versus a new 2013 Honda CR-V AWD.

HondaCRV

 

Items to Consider:

1. Interest rates – Often times a used car will have a much higher financing rate than a new car loan. Currently (with a top 16% percentile credit score), I can get around a 4% loan from my local bank (more competitive rates available online). However, currently most new dealers can find a way to get you to 0.9% or even 0%. On a $10k used car expect to pay about $1050 in interest on a 5-year 4% used auto loan. Meanwhile the new $21,060 car would only pay $507 dollars in interest over the same 5-year period.
New car net savings: $543 over 5 years (note this includes taxes, fees, delivery fee for interest calculation)

2. Repairs / Maintenance – That used car should probably be checked out by a mechanic and is most likely close to a point where some routine maintenance should be performed. Transmission flush, struts, new wheels, brakes, tires, etc. My ballpark figure is, you should expect to put in about $500 to $1000 right off the bat (or more), and know that repairs are much more likely in the near-term versus a quality new car. It’s hard to put a ballpark on this item overall, but I would estimate at least $2k-4k in repairs over the course of 5 years.
New car net savings: Estimated $2k – $4k over 5 years.

3. Salvage value – Probably the biggest item to consider in this category. Your $10k used car is most likely going to depreciated into the sub $5k category within the next 5 years (this can vary depending on the car). The new car will also depreciated, very quickly in fact, but you will be left a car most likely worth $9-13k (Note: A 5-year old, 2008 Honda CR-V LX with 50k miles is worth $13.9k in very good condition).
New car net Salvage Value: $4k – $8k in value after 5 years.

4. Insurance Savings – Often insurance companies offer savings on new cars, but this highly varies. My savings came in at $28 every 6 months.
New car net savings: $280 over 5 years.

5. Warranty – Ties back to #2, but there is a kicker here. Most insurance companies will offer customers the ability to opt into a program that covers your new car from large repairs. These programs do not include normal maintenance items and do have a deductible usually around $250, but if something seriously goes wrong, You could save a lot of headache and money. Geico offered me the ability to extend this coverage that is effectively a warranty with a $250 deductible, for a cost of about $2.60 a month (around $220 for 7 years). My policy however does the limit the ability to opt into the program for the first 15,000 miles and only goes up to 7 years / 100,000 miles.
New car net: Peace of Mind / Avoid large repair bills (optional)

6. Quality of Life Improvement – Cannot put a dollar amount on this, but you are driving a newer, nicer, and more reliable car.

7. Mileage – In this example the mileage on the newer CR-V is about 3 more mpg on average, and that adds up to a lot extra savings.
New car Net: $877 over 5-years (assuming 50,000 miles at $3.50 a gallon)

8. Safety – You cannot put a price on your safety and it’s my opinion that a new car is more likely to be safer for you and your family than a used car with a lot of unknown miles and experiences.

9. Taxes / Delivery Fees / Recording Fees – The difference between a $10k used car and a new $22k CR-V is about $1.7k.
Used car net : $1.7k.

The new car saves you:

  • $543 on interest,
  • $2k – $4k in repairs,
  • will be worth $4k-8k more,
  • will save you $280 in insurance,
  • will allow you get a cheap extended warranty through your insurance that is only available to new cars,
  • will improve your quality of life,
  • $877 on gas savings, and
  • provides a safer vehicle for you and your family.
  • minus the extra taxes / delivery fees / recording fees of $1.7k

Total Savings: $6000 – $12000

Downsides to new car:

  • Monthly payment is higher (but note this is the not the “net payment” due to items consider above)

Now its finally time to compare the actual “net payment,” giving you my real world exact pricing of what I paid. These numbers assume $3k of additional expenses (repairs) on the $10k used car over the 5-year period. It also assumes the salvage value of $11k for the new car (conservative) and $5k for the used car after the same 5-year period. It also assumes no trade-in or down-payment. Note: Trade-in’s often net a sales tax benefit in most states.

New Honda CR-V $10k Used CR-V
Cost Of Vehicle ($21,060) ($10,000)
Recording Fee ($250) $0
Delivery Fee ($790) $0
Taxes ($1,307) ($650)
Total ($23,407) ($10,650)
Monthly Payment ($399.11) ($196.14)
Interest Rate 0.9% 4.0%
Total Payments ($23,946.38) ($11,768.16)
Repairs $0.00 ($3,000.00)
Insurance Savings $280.00 $0.00
Gas Savings $877.00 $0.00
Salvage after 5-Years $12,000.00 $5,000.00
Total Cost ($10,789.38) ($9,768.16)
Net Monthly Cost ($179.82) ($162.80)
Difference ($17.02)
Difference: 5-years ($1,021.22)

The difference comes down to a measly $17 a month, not quite as dramatic as most people think it would be. This example also assumes a lower than expected salvage value by about $1.9k and a repair cost of $3k that might be too conservative. It’s very possible that despite the larger monthly payment, the overall cost difference might be very close to zero, especially if you keep your car in “very good” condition.

Did I mention my CR-V has backup cameras, Bluetooth, Pandora accessible, speed dial, and a standard 36k / 3 year warranty? My decision to buy a new Honda CR-V versus an old 2008 CR-V was an easy one without regret.

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