Conventional wisdom has always taught us that springing for a new car instead of a slightly used car was a financial mistake. In fact, I’ve written about what you need to know before buying your next car and buying used over new was one of my key points. The reason is that cars are depreciating assets and it isn’t uncommon for a new car to lose anywhere from 10-20 percent of its value in the first year. So, if a savvy consumer is shopping for a car it often makes sense to get a used model about a year old with low miles. This way the original owner takes the greatest depreciation hit while they get an almost new car still covered under warranty.
Well, the economy has changed the game for many makes and models and in some cases you can actually buy a new car for less than the same car used. New data from Comerica Bank’s Auto Affordability Index shows that new cars are now the most affordable they’ve been since records started being kept in 1979. In fact, the average new car is now $1,700 cheaper than it was during the last quarter of 2008.
Simple Supply and Demand
Why are many new cars cheaper than their used counterparts today? It’s all about supply and demand. In this weak economy, people wised up and tried to save money wherever possible. One big expense for most people comes in the form of a car payment so it only made sense they look toward used vehicles to save a few bucks. If you recall your Economics 101 class you’ll probably remember some time being spent on the law of supply and demand. Basically, if the demand for something increases, prices generally rise. And if businesses find themselves holding on to excessive supply the prices tend to fall in order to move the product.
That’s what’s happening in this recession. The demand for used cars is greater than that of new, so dealers know they can mark up used car prices a bit to make more money and in turn have to lower new car prices if they want to move them. There’s also an issue with supply since new car inventories are high, but as more used cars are sold the used car inventory is lower, again driving up the prices of used cars and lowering the prices of new. If you’re in the market for a new car there couldn’t be a better time.
More Than Just Prices
There’s more to the car buying game than just the bottom line price. Most people have to finance some or all of their car purchase. This means there’s usually going to be the issue of interest paid to consider. Depending on the interest rate, amount financed, and length of the loan, you could be talking about thousands in additional costs. Where new cars are also beginning to shine again is with attractive financing terms. A lot of automakers and dealers are offering attractive zero percent financing, or very low financing rates of just a percentage point or two.
If you’re going to be borrowing a large chunk of money and can do so without paying any interest to do so, that’s a hard deal to pass up. When you compare a new car that might cost $1,000 more than the same model that’s a year old but can get 0% financing on the new car and the best rate you could get to finance the used car is 6.5% you need to do a little quick math. If you are going to finance $15,000 either way, know that on a 48-month loan you’ll end up paying over $2,000 in interest. So, even if the new model is $1,000 more, because you aren’t paying any interest you’ll still save over $1,000 on your total purchase (not including any possible differences in insurance premiums, gas mileage, maintenance, etc.). If the new car is actually the same price or even cheaper than used the savings just climbs from there.
Guess what? They don’t just hand out 0% financing to anyone who walks in the door. Read the fine print and you’ll notice these deals are reserved for those who qualify and have good credit and it may even require a significant down payment. Just one more reason why you need to improve your credit score if you’ve had trouble in the past.
Looking at the Big Picture
Just because the trend right now is for new cars to be cheaper than slightly used, remember that it can still be much cheaper to buy used. The data here talks about buying low mileage cars that are just one year old compared to their new counterparts. But if you don’t need something that new you can still save a lot of money by buying a car that is a few years old, has more miles, etc. This is still typically the best course of action for those who don’t drive very much, aren’t concerned about a warranty, and so on.
Even more important is that you shouldn’t let the idea of a new car being had for cheaper than used force you to buy more than you need or can afford. Yes, it’s a great feeling to know you can put yourself into a brand new vehicle with zero down, no interest, and still pay less than buying used, but that’s no excuse to step up to something that you otherwise wouldn’t have bought. Not only is stretching yourself thin just because it’s a good deal a bad idea, but the higher up in price you go, typically the higher other costs go as well. This means higher insurance premiums, higher maintenance costs, and maybe even fewer miles per gallon leading to more money being spent on gas. Suddenly that money you saved on zero percent financing ends up costing you even more in the long run because you’re spending the savings on other things.
In the end, cars are still depreciating assets and one of the biggest reasons people find themselves in a financial bind. If you stick to thinking about your vehicle as simple a reliable way to get from point A to point B, find the best deal possible, and keep in mind all of the costs associated with owning a car you’ll be better off.
If you are in the market for a vehicle and have been debating whether or not to buy new or slightly used, Edmunds has put together a comprehensive list showing you which new cars are the best deals over used, and which models are still a better bet to buy used. Don’t stop there. Be sure to get auto insurance quotes and compare features to make sure you’re getting a true apples to apples comparison.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.