Purchasing Used Cars Versus Financing a New Vehicle

Purchasing Used Cars Versus Financing a New Vehicle

Unless you have another way to get to work, buying a car is something that most commuters must do every once in a while. Sometimes, people buy a brand-new car because we like the commercials, the eye-catching design, or that aromatic new car smell. Well, I make an effort to buy my cars used in order to avoid extended monthly car payment; I’ll get into that a bit more.

Reasons to Not Buy a New Car

Borrowing a loan for a new car isn’t always a bad idea, but there are a few disadvantages that I would like to point out.

Lower Disposable Income

When you borrow money to buy a car, you are on the hook for an auto loan or something along those lines, meaning you need to make monthly payments on the loan. For the next few years, a part of your paycheck will go to the lender until the entire car is paid off. That money  could be devoted to a mortgage payment, a student loan payment, or a savings account that generates interest, but instead, it goes towards your transportation.

By buying a used vehicle up front, you own the car without the stress of making another monthly payment. This is especially helpful if you have trouble making ends meet on a monthly basis. Of course, there are drawbacks to this. You need a block of money to make buy a car without a loan which you may not have if you’re struggling.

Car Depreciation

Cars are constantly losing value because of car depreciation. Brand-new cars lose 9 percent of their value the second it is off the lot. This means that $30,000 car with a loan balance of $30,000 is only worth $27,000 right off the bat. In essence, you owe more on the car than it is currently worth which doesn’t sound ideal.

Buying a used vehicle that is a few years old can only cost half of the original selling price. While you might not be covered by the original manufacturer warranty anymore, any potential repair costs should usually be cheaper than the monthly payment for a new vehicle.

This brings me back to my point about devoting funds to a mortgage payment or student loan payment. While a car might cost you $30,000, by the time you’re finished paying the loan off, the car will have depreciated in value considerably. In short, it won’t contribute to your net worth as much as paying off a mortgage or student loan.

Paying Interest

With any loan, you’ll be paying interest. If it takes you a while to pay off $30,000 in auto debt, you could pay an additional $3,000 in interest or more depending on the interest rate as well as how long it takes you to pay. If you plan to sell the car after several years, you will lose money because of depreciation and interest. By going with a used car, the car is 100 percent yours from the start, and you also don’t pay any interest!

When It Might Be Worth It

While I am a proponent of used cars, sometimes it makes sense to buy a new car and make the monthly payment.

You Can Get a Zero Percent Loan

If you can get zero percent financing, then your entire monthly payment is used to repay the purchase price of the car. There will always be car depreciation, but a 0 percent APR loan would eliminate the expense of interest, leaving you with the sticker price.

Why would a dealer offer zero percent financing? Sometimes, dealers want to clear out their inventory, or they want to try and sell more of a certain car model. At any rate, you should read the fine print carefully because some dealers might offer zero percent financing for only a few months. In many cases, the offer is only introductory in nature.

You Plan to Keep the Car for a Long Time

If you plan to keep your car for ten years, the depreciation factor doesn’t really matter. You will have used the car for most of its useful life, and keeping a car long-term is more cost-effective than selling it for a new car and auto loan after short time period.

Plus, owning one car for ten years can be cheaper than buying two or three used cars during the same period. However, all of this is heavily dependent on what cars are involved, so this can be true or false depending on the scenario.

You Cannot Afford a Lump-Sum Payment

Depending on your financial situation, you might be better able to afford a new $20,000 car through monthly payments versus a quality used car that costs $10,000 up front.

Of course, that was a generic example that doesn’t represent every situation, but the main point is that coming up with lump sums of cash at one time can be tough. It takes several years to save up enough money to buy a used vehicle with cash. For instance, a new college graduate with minimal professional experience probably hasn’t had time yet to accumulate that much wealth.

If you cannot afford to buy a quality used vehicle in full, then you may need to consider a payment plan for a new car after weighing the pros and cons.

You Can Get a Manufacture Warranty

Another reason to buy a new car is that most major car malfunctions are covered by manufacturer warranties for the first three to five years. The coverage provided by such a warranty could be worth it. This would depend on the type of malfunction as well as the coverage you have because sometimes you just might not be covered. Additionally, if you have a trustworthy mechanic, then handling a used car’s repairs could be more cost-effective.

Have the Chance to Build Better Credit

While it’s not always a good idea to borrow money purely to build your credit score, timely monthly payments will show future lenders that you have experience making loan payments on schedule. There are plenty of other factors that go into credit scores though. For instance, taking on more debt could have a negative effect on your debt-to-income ratio, but this depends on your current income and debt situation.

 

There will always be a debate of whether it is better to buy a new or used vehicle. You can certainly make a case both ways. While there is no wrong answer to the debate, you can still be wrong at the end of the day. You should analyze how buying used or financing a new vehicle will affect your monthly payments as well as debt-to-income ratio. Buying used can save you money in the long run if you can afford the lump-sum payment, but the benefits of having a new car can be worth the additional cost and the monthly payments. It takes special consideration to get it right; after all, everyone’s financial situation and commute is different.

Leave a Reply

Your email address will not be published. Required fields are marked *