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A new car is always a tempting proposition, new models are very attractive following the latest trends in styling and technology. But difficult as it might be you should resist the urge and purchase a used car instead. In just about every situation buying used will save you money.

When Buying a Used Car is a Good Idea

When you purchase a new vehicle and drive it off the dealer’s lot the car is considered used and instantly drops about 9% in value. The depreciation clock starts ticking and the most value will be lost in the initial few years of ownership.

On average a car will lose about 20% to 30% of its value in the first year

On average a car will lose about 20% to 30% of its value in the first year and then about 10%-15% a year for the next few years. In about three years the car could be worth below 60% of its original value, meaning it could be worth as little as half of what you paid for it new.

The more expensive the car the steeper the initial drop in value. Expensive luxury vehicles tend to depreciate the quickest. That is partly because they are frequently leased and not bought due to the high price point and payment. Leases are usually short and result in a large volume of subsequent lease returns that increase the inventory of used vehicles for sale.

 A chart illustrating the average depreciation for a new car.  A new car will lose 25-30% of its value in the first year. After 4 years could drop by more than 50%.  Average mileage on a lease return is 36k miles.

A popular used car website iSeeCars conducted a study in 2017 analyzing cars with the highest 3-year depreciation. Those cars are potential bargains for purchase at lease end. Here are a few of the top examples from their list:

  • Cadillac CTS – 51.4%
  • Cadillac ATS – 50.4%
  • Mercedes-Benz E-Class – 48.4%
  • Mercedes-Benz C-Class – 48.3%
  • BMW 5 Series – 48%
  • Nissan Maxima – 47.9%

High depreciation creates an opportunity to pick up a good deal especially if the car remains under warranty. But be mindful of maintenance and repair costs extending beyond the warranty term or ones that are not covered by the warranty. Luxury vehicles are always more expensive to maintain and fix.

Extended warranties are typically available for purchase and many dealers also have CPO programs (Certified Pre-Owned Vehicle). With CPO ars undergo regular manufacturer’s inspections and maintenance and come with additional warranty.

But even cars that hold their value well will depreciate on average about 35% in the first three years. THUS creating an opportunity for a good deal with low mileage.

But even cars that hold their value well will depreciate on average about 35% in the first three years. Thus creating an opportunity for a good deal with low mileage. You can find a reasonably priced car matching your budget and lifestyle with the majority of depreciation already absorbed by the original owner or lessee.

A man driving a vehicle with one hand on the wheel, from the perspective of a back seat passenger.

Does it Ever Make Sense to Buy a New Car?

In general buying new is never the right option financially. Arguably an exception to this could be a low-cost car that holds its value very well, such as a Honda Civic. If you are able to negotiate a good price, you may be only giving up $2-3k in depreciation.

Some reasons for purchasing new:

  • Being the only owner – not having to worry about prior owners and how they used the car
  • Low to no maintenance for the first few years
  • Rebates and factory deals
  • Low-interest rate incentives
  • Latest gadgets and safety features

Those are valid points to consider and you may be able to justify the purchase due to convenience or peace of mind. Or being into the latest technology and gadgets, or maybe just having enough money on hand that you simply don’t care.

But if you do care about saving money even the 0% financing and a discount on a new car may not compete with the value you could get from depreciation.

Buying a New Car vs Buying a Used Car

The decision comes down to price, depreciation, interest rate, and the length of time you plan on keeping the car for.

Cars that are expensive and/or depreciate fast are prime candidates for buying used. They will drop in value quickly and by a significant amount.

Cars that are expensive and/or depreciate fast are prime candidates for buying used. They will drop in value quickly and by a significant amount.

A zero percent interest rate may be tempting but it will not be enough on its own to save you from the significant losses due to depreciation, do the math before you jump on that special offer.

If you intend to hang on to the car for only 3-4 years you should opt for used or at the very least also consider a lease. I’m not usually a fan of leasing but it might be a better option than buying new.

A white BMW 3-series parked on gravel in front of a forest
A 3 Series BMW can depreciate 46% over the first 3 years.

High Depreciation Example – BMW 3 Series

Consider a 2016 BMW 328i which retailed at an MSRP of $39,000 and one that you can now (3 years later) pick up for about $21,000 with less than 30k miles on the odometer.

We’ll omit taxes and fees for both scenarios. With 0% interest on the new car purchase, it’s simple, you will have paid exactly $39k by the end of the loan.

For the used car purchase we will take a 3-year loan (36 months) at 4% interest. By calculating your payoff you will find that by the end of the loan you would have paid a total of $22,056. That is almost $17k less than the $39k paid for the new vehicle. Assume you had to purchase an additional extended warranty for $2,000 you would still have saved $15,000.

Even with a 0% interest rate you would still spend $15,000 more to buy NEW

Note that we omitted the monthly payment specifically so that it doesn’t become the focus and you pay attention to the totals instead. But the payment on the new car loan comes out to about $650 and used at about $496 per month.

To sum it up take the savings of $15k and weigh them against your reasons for purchasing the car new. Understanding the numbers will allow you to use reasoning and not allow feelings or emotions to cloud your decision, whatever it might be.

Low Depreciation Example – Honda Civic LX Sedan

A new 2016 Honda Civic LX Sedan sold for about $20,000. You can buy a used one for around $14,000 with under 36k miles.

The math is again simple for the new purchase, at 0% special financing (excluding taxes) you are paying the full $20k.

With the used car, you are financing for 3 years at 4% interest and 20% down payment. The total you would have paid is $14,705. That is over $5k of savings. With an additional extended warranty costing $1500, you will be saving about $3800 if you paid for the warranty in cash.

Keep in mind this example is assuming 0% financing on the new car if you took out a loan at 4% for 60 months the new car would cost an additional $1,700 in interest making the savings $6,700 and a more compelling case for buying used.

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