Recently by Eric Peters: Debt by a Thousand Little Cuts…
Buying a used car can make a lot of financial sense – with a few clauses and caveats:
Higher interest rates on used car loans – and shorter loan periods – can eat away at the up-front price advantage of a used car over a new one.
You’ll usually pay higher interest on a used car loan, in part because the loan term is shorter. So, it’s a double tap. You’ll almost certainly pay a higher rate – and you’ll pay more per month. Even though you probably won’t be making payments as long as you would if you bought a new car on the usual five-year payment plan, the lower monthly payment may be easier to bear. Any finance guy worth his salt will tell you to never overextend yourself if you can possibly avoid it. If financing a used car for $400 a month for 36 months means that for the next three years you’ll have trouble coming up with extra cash to buy the occasional pizza – let alone a new refrigerator if your current one craps out on you – then it might be smarter to sign up for the new car loan at $250 a month for five years. Keep in mind, too, the very real possibility that gas prices could increase dramatically at any time (along with the cost of everything else, courtesy of inflation). Make sure you have enough cushion in your monthly budget to handle such eventualities.
Anticipate higher – and sooner – maintenance costs if you buy a used car.
A new car will not need things like new tires, transmission service, a tune-up or brake work, for several years – and the cost of any repairs will be covered by the warranty – while it may be necessary to buy new tires (or get the brakes fixed) if you buy a used car. And the cost will likely be covered by you.
Some makes/models require very expensive service at certain time/mileage intervals – such as timing belt changes at 70,000 miles. That job can be $500 or more.
Be sure to factor these peripheral costs into your buying decision and set aside some money for “just in case” repairs – especially if the used car is no longer covered under warranty. And extended warranties? Think about it carefully before you buy one of these. Some cost as much or even more than almost any conceivable repair short of a complete catastrophic failure of the engine or transmission; many only cover major stuff that’s not likely to fail unless the car was abused – or it’s a lemon. By being careful about the used car you pick (specifically, by having it thoroughly inspected by an independent mechanic you trust prior to purchase, as a condition of the sale ) you can cut the odds of a major problem happening down to slim – and probably none. Then, instead of paying $1,500 or more for an extended warranty, leave the cash in the bank. If you need it for repairs, it’ll be there. And if not, you’ll have it to spend on something else.
If you buy a used car and buy it outright (no financing) you can choose a lower-cost liability-only policy that doesn’t cover physical damage to your car in the event of an accident. This can knock your insurance costs down to maybe a couple hundred per years vs. two or three times that for a full-coverage comprehensive policy – which you’ll be required to buy if you finance, whether the car is used or new.
Just remember that you could face having to pay for repairs out of your own pocket – maybe even buy a replacement car on your own – if you do get into an accident. If you’re a good driver, the odds are pretty low, but things can (and do) happen. Here again it’s good policy to have some money set aside for “just n case” so you can deal with things like having a fender replaced if you accidentally bag a deer with your Honda – without having to head for the pawn store first.
Also, though premium cost for used vehicles tend to be lower, some insurers will lower their rates for a new car equipped with the latest safety equipment (such as stability control and ABS) vs. an older, used car that may not have these features. And of course, rates vary depending on the type of vehicle. It may cost a lot more to insure a used Corvette than a new Camry.
It’s a good idea to shop insurance quotes before you decide to buy a car – new or used.
Longevity – and depreciation.
A brand-new car should last longer than an older, used car, which by definition has already been used. It has miles on the odometer – and so, wear on the various bits and pieces. Even if the car has just been sitting, the clock is still ticking.
And while a new car will depreciate faster at first, it should also be worth more, longer – again, because it starts out having higher value.
On the other hand, late-model used cars with 40 or 50 thousand miles on them will usually go at least another 100,000 largely trouble-free miles if you don’t abuse them and maintain them properly, especially the basic stuff like regular oil and filter changes. And if you get a really good deal on a four or five-year-old used car and plan to drive it for another four or five years or more, depreciation won’t be as much of a factor anyhow since by the time a car (any car) is pushing ten years old, its value will begin to plateau – regardless of whether it was originally purchased new or used.
Just some food for thought!
Reprinted with permission from EricPetersAutos.com.