Thriving Millionaires

By Patrick

The age-old question: should you buy a new or used car? This is one of those debates where people hold their ground and don’t change sides. I’ve heard both sides of the argument, and there are valid points to be made all around.

On the used car front, it’s hard to argue with the fact that a new car loses approximately 20% of its value in the first year of ownership, and 10% thereafter for the next several years. Wouldn’t it make sense to buy a car after its undergone rapid depreciation?

New car owners will tell you they buy a new car for the great warranty, comfort of knowing what the car has been through, and that wonderful smell. If you’re one who loves cars and the comfort that comes from knowing its history, this can certainly be a great decision.

With that being said, there are certainly situations where buying new or used can make sense. Today, I’d like to highlight some of the key scenarios where it makes great sense to buy a used car. As with everything Thriving Millionaires, your decisions are going to depend on your life situation and what’s important to you.

You Know The History of the Car

This is one of the reasons new car owners will tell you that they buy a new car. They want to know the history of the vehicle. This includes regular maintenance, how it’s been driven, what the car was used for etc. While some online services like Carfax can tell you about the history, there are some things missing. For example, what if the car had been driven very hard. This could put extra wear and tear on your car and you wouldn’t really be able to tell just by looking at maintenance reports.

This all changes when you know the history of a used vehicle. For example, you may be purchasing the car from a family member whose driving habits you trust. Another situation is buying a car in a particular market. My uncle talks about buying used luxury cars with low miles from areas like Palm Springs. The likelihood that the car was driven carefully by a retiree is high, and if you do some due diligence, you might be able to find a great vehicle in new condition for a fraction of the cost! If you know the history of a used car, this can be a great option.

You Aren’t As Concerned About the Newest Features

People love new cars because they come with all the newest bells and whistles. Every year, carmakers add a feature here and there (between major refreshes) to ensure car buyers feel like they stand out from the crowd. If these things don’t matter to you, there is less of a reason to buy the newest vehicle.

It’s important that you evaluate what features are incredibly important to you. Things like heated seats, leather, performance engines, etc. have been around for ages. You don’t need a new car for features like these. If you’re looking for the most advanced self-driving technology, then you may have to look at a new car. It’s important to know what features are important to you and if you can get them in a used car. If you’re willing to be flexible with the make and model of the car you’re buying, you can probably find almost everything you’re looking for in a used car.

You’re Primarily Concerned About Finances

At the end of the day, no matter how you slice it, you will generally spend less money when you purchase a used car. Sure, you can’t predict maintenance issues or know exactly how much a car will depreciate, but the general rule of thumb is that most of the depreciation happens shortly after a new car is driven off the lot. If you’re looking to minimize depreciation when purchasing a car, used is the way to go.

An important point to keep in mind here is the depreciation schedule of different cars varies. It’s worth doing your homework as to what cars retain their value. A simple google search of “cars that retain their value” will yield a variety of different sources. In these instances, you will realize that some used cars may not always be the best financial deal – and it can vary from market to market.

Used cars can be a wonderful treat. They can also come with their fair share of problems. After major environmental disasters, many sketchy dealerships might try to sell you a used car that was previously damaged in a storm. Things like this are critical for you to be aware of. If you do your homework beforehand, you can end up in a really good place when it comes to a used car.

I’ll leave you with this one message – there is no silver bullet to making a decision on whether to purchase a new or a used car. But when it comes to a used car, it’s not that buying one is the better decision, but rather that buying the RIGHT one is.

Eric’s Thoughts

Buying a used car may be the best option for many people – and generally it has nothing to do with how much money you have in the bank. A vehicle purchase is one that is largely dependent on circumstances more than credit scores and savings rates.

For example, if you are in the market to buy a car for the family, and after 8 months of driving to various car dealerships looking for a specific used car, browsing AutoTrader for the same car, and looking through Craigslist and other online marketplaces to no avail, you may end up buying a new car because 8 months is probably 8 months longer than you had planned to still be driving the old car. Conversely, if you are looking to buy a new car, and upon setting foot on the very first dealership you visit, you see the same exact car with the exact features and colors with low mileage and a significant discount – you may find yourself buying a used car when you expected new.

As Patrick states above, there are many benefits to buying either a used or a new car. For that reason, I’ll outline some additional areas of consideration specific to buying a used car.

Used cars, to some extent, allow you to see the future. No – you won’t be able to win the lottery (sorry) – but you will be able to understand what repairs and maintenance on the car will likely look like down the road. Buying a car two-three models years old allows you to see what things broke on the same cars since they were new.

If you know that 50% of Brand X cars need to have the transmission replaced after 25,000 miles – you will be able to avoid Brand X cars in your search. If you know that Brand Y cars retain their value extremely well, you can search for a Brand Y car if that is important to you.

While you can do the above for a new car – it does become slightly harder to look at previous model years as a perfect proxy for the newest model because auto manufacturers change small things from year to year which can have unintended consequences in some cases.

Additionally, used cars come at a pretty good discount to their new counterparts. This discount can show itself in your budget in two ways depending on how you purchase the car: more free cash in your monthly budget or a larger balance in your savings account.

If you make payments on your car, buying used may save you $100-$300 per month. That money could be used to pay for things like gas, insurance, and oil changes. If that is how you like to think of the savings, that allows you to buy a used car but have the difference “pay” for all the associated spending.

If you end up buying the car with cash or a check – you may find yourself with $5,000-$15,000 more in your bank than you were planning to have after the purchase of a car. That money could be invested, used to pay down credit card balances, used to pay off a spouse’s or child’s car, used as a down payment on a house, etc.

While circumstance may drive your ability to find the perfect used car, the financial positives to used car purchases are hard to ignore. For some, that may mean putting up with a different color car than they wanted, but knowing that gas was “paid” for by buying used and settling for the closest match. For others, that may mean waiting months for the perfect used car because they don’t want to settle, but still want to buy used.

All that said – buying a used car is just one option. Buying new can also make sense in certain circumstances. More on that on Thursday!