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.
I meant a feature from the POV of the car dealership. It's actually pretty smart, as it has the side effect of driving down the competing supply for cars, therefore driving up their own profits. That doesn't mean I condone it -- actions that are 'smart' can simultaneously be unethical, as is probably the case here. So there's no need for the aggressive non-sequiturs. "Good" and "idiotic" aren't opposites, and natural disasters are not caused by construction workers.
@Meg, I'm not sure I follow. If you mean that it's a feature for the people trading in their clunkers (or plain-old used cars after the program ended), then yes, it is great for them. During the program, they got more money for their cars than they were worth. After the program, the scarcity of used cars means that their used cars were more valuable.
When I say the program is idiotic, I mean in the sense that "destruction" is never progress. There are a lot of resources that go into making a car. Taking a functioning item that could be useful to someone and destroying it destroys that capital. It is a waste of resources. It forces people to spend more resources than they would have otherwise, resources they could have used to purchase shovels, strawberries, or video games.
If you think that the clunkers program is not idiotic, then you must also believe that natural disasters like hurricanes are good because they provide employment for the construction trade.
In short, it's just another example of the broken window. We see movement in the auto industry, but what we don't see are the lost sales of TV's, Blu-rays, etc. I have no doubt that it was a calculated move to buy votes by taking from the many to give to the few. In that sense, for the administration, it was probably not idiotic. Those who rob Peter to pay Paul can always count on the support of Paul.
@todd, is it really 'idiotic' though? I hadn't thought about the cash for clunkers deals like that before, but from the POV of the people who are offering them, a decrease in the used car supply would be a feature, not a bug. I wonder if that's (part of the reason) why they do it?
I’ve always sprung for used cars because that way I can afford models which I wouldn’t dream of buying new. Before buying any car I make it a point to check for typical car safety features (that get me lower insurance rates). Small thing, but it goes a long way in keeping your rates down.
Jeremy, I've been meaning to write about the fact that new cars occasionally make more financial sense than used cars for a while, but you beat me to it. And to be perfectly honest, you did a great job, so I won't bother cause my post wouldn't be nearly as good!
ALWAYS BUY USED, and try to buy from a private seller as well.
I'd never buy new, only because you can get STEALS!
I recently bought a 1997 Camaro Convertible with 93k and no problems for $1000.
Thats very cheap, almost $3000 under Blue Book. I got it from a private seller wishing to get it out of his lawn, and it saved me a fortune.
My sister learned the expensiveness of operating a cheaper car the hard way. She got reamed left and right with break downs, gas prices, expenses, high insurance, you name it. Cars are one of the biggest liabilities a person can own.
Sure, higher end cars depreciate, but at least you're not spending a thousand a month in repairs!
My first car i bought new and bought a repair manual (car and manual cost 9k with 0% financing). I ran it for 250,000 miles (7 years) doing all of the maintenance and repairs (thanks to the Hayne's manual). When it finally needed major work I gave it away and bought the exact same model and year from someone with 100,000 miles on it (for 500 bucks). I already knew how to work on it. It now has 200k miles and is still running great. When it goes i will attempt to again buy the same model, if not the same year. Not because the model is important to me, just the knowledge i have of it.
I think that any new car bought for the price of a used one is unlikely to last. It's only smart to buy new if you can pay the entire cost up front. Otherwise you have to carry collision and comprehensive coverage, an added expense required when you get a loan. Then of course there's the interest.
I have always had very good luck with 5-year-old cars with 40,000 miles or less in the $5,000 range. A Dodge Caravan and a Mercury Mystique. The Dodge was making me nervous with its high miles and age so we sold it cheap to a friend. It's now retired to Nantucket as a summer vehicle. The Mercury was excellent and paid for itself with how much we got out of it. I recently inherited a Ford Focus and the Mercury is now being driven by the neighbors daughter.
My husband has done well with pickup trucks bought at auction. The electric company sells their cars off as soon as they turn 5 years old, whether they need it or not. He has bought his last three trucks for $2,000 a piece and driven each of them into the ground.
This is very interesting. I've been looking at buying a new car recently and I've noticed a similar trend. But you're right, you can still save a lot of money if you're willing to buy a car that is a few years old instead of one year. You still have to be careful here though because this kind of car can end up costing you a lot of money as well. I bought a used Saab that was a few years old, got a really good deal on it, but it had so many problems after the first year that I ended up spending more money on it than if I had bought it new. That's certainly not to say all cars that are a few years old will give you trouble, you just have to do your research if it's been with a previous owner to make sure you get a good one!
Add to the mix a decrease in the supply of used cars as a result of the cash for clunkers program, which took perfectly good, working cars off the market. What an idiotic program.
Great perspective. However, I think that when I have intentions of buying a used car it'd probably be a beater car like an old honda civic that I can get for $5k-$6k. Something that I wouldn't make monthly payments for and something where I won't have to buy full coverage insurance either. Also, a lot of beater cars get better mileage so I'd probably be saving gas money as well. Although I know there are lots of risky downsides to buying a used car too like repairs.
Interesting! My first (and only!) car I bought new. At the time, interest rates were better for new cars than used, and I could take advantage of new grad rebates as well.
Mind you, I bought my car with the intention of driving it into the ground rather than replacing it every few years, and I bought a reliable car that I knew wouldn't need much maintenance and would its value well if it I did have to sell it.
So far, it's worked out very well for me!