New vs. Used: Which Car Is Right for You?

A new car may be out of your budget, but buying a used vehicle could mean expensive repairs. Here’s what you need to know to spend your money wisely.

Woman Entering Into New Car Dealership

by NEA Member Benefits

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Key takeaways

  • A used car may be cheaper, but a new car may need fewer repairs and is covered by warranty.
  • To decide what’s right for you, consider how the car will be used, how much you can spend and more.

You’re ready to buy a car, but how do you decide whether to buy new or used? There are good reasons for both, but the essential trade-off is between cost and peace of mind. A used car can be cheaper, but a new car may need fewer repairs and is covered by warranty.

Here’s what you should consider as you weigh your options. Keep in mind that we are not seeking to make this decision for you. But we do want to provide the best available information so you can make choices which work best for you!

How will you use the car?

For example, do you need an all-purpose family ride? In the interest of safety and economy—and to avoid the risk of a breakdown or costly repairs—you might opt for a new vehicle that meets the latest emission and fuel efficiency standards and carries a lengthy factory warranty.

But if you need a car mainly for your commute to work, you have different options. Do you have a long-distance commute and want a new model that will outlast its loan? Or a short commute in stop-and-go city traffic, for which a more affordable used car—one that you wouldn’t sweat a ding over—might fit the bill?

How much can you afford?

Estimates on what’s “affordable” vary. But if you follow a traditional debt-to-income (DTI) ratio recommendation, you’ll want to limit all of your debt payments (including auto loans) to 36% or less of your gross monthly salary. As for the car loan itself, SmartAsset.com recommends spending no more than 15% of your monthly take-home pay on all auto expenses (including the loan, insurance and maintenance). 

However, this only applies to those who aren’t dealing with other forms of major debt, like huge credit card balances or student loans. In these cases, you probably want to lower the monthly car expenses even more—perhaps down to 10%. 

As for the down payment, Interest.com recommends paying at least 20% of the vehicle’s cost before you drive it off the lot. And according to NerdWallet.com, not only will this lower your monthly payments, but it will help offset the first-year depreciation of your vehicle and keep you from owing more than the car is worth from day one.

Weigh your options: New vs. Used

Once you’ve answered the questions of use and budget, you can get down to the nitty-gritty of actually choosing a car.

One important note: Before you move forward with buying a used car, make sure you have a reliable mechanic who can inspect it before purchase and who can maintain and repair it as needed. With that caveat, here’s a basic comparison for shopping for a new or used vehicle.

PRICE

New: Dealers often will offer steep discounts and have factory rebates available on a new vehicle, drastically reducing the sticker price, especially toward the end of a model year. Plus, they may provide financing on more favorable terms. 

Used: You can hardly buy a new car under $15,000, but you have a wide selection of used ones at that price, with features which would cost you a bundle in a new car. On average, you’ll spend $756 less every year on a used vehicle, according to our calculator, which can help you compare various price factors in new vs. used purchases.

INTEREST RATES

According to Bankrate.com, loans for new cars have lower interest rates than used ones because lenders view new cars as less risky since they’re not as likely to break down. As a result, Experian.com estimates that the average interest rate for new cars is 6.13%, compared to 9.59% for used ones.

RESIDUAL VALUE

New: A new car will lose about 10% of its value as soon as it leaves the dealership, according to CreditKarma.com. By the end of the first year, it loses 20%. By the fifth year, it will lose about 60%. It’s more likely that you’ll keep a new car longer than a used one, so you should factor all of this into the overall cost equation.

Used: The rate of depreciation in a used car depends not only on the durability and reputation of the car but on how aggressively the manufacturer is selling new products. If the manufacturer is giving a steep discount to new cars, this will depress the residual value of older models.

WARRANTY

New: A factory warranty covering major operating parts in a new car eliminates most of the worry about unexpected expenses. With more in-vehicle electronics than ever, this guarantee of maintenance and repair presents great appeal.

Used: The factory warranty still may be available for a used car, and you save the initial hit on depreciation. This is especially true of certified pre-owned (CPO) vehicles offered by dealers. But be careful: These often have huge markups. You also have the option to purchase an independent extended warranty.

CHOICE

New: Theoretically, you can order anything you like in a new car. But practically speaking, the incentives to buy a car off the lot can be so enticing that it’s a difficult choice to spend more for just the right color.

Used: Finding the right used car may require some patience, although online shopping has made it a lot easier. Let yourself be surprised: You may find you like something completely different from what you were originally looking for.

TECHNOLOGY

New: Obviously, new models will have more up-to-date technology, including built-in GPS, connected mobile apps (such as those that allow you to remotely lock and unlock your doors and check your gas tank level) and the ability to connect your smartphone to your in-vehicle infotainment system so you can stream music or use other apps right from your phone.

There are also advanced safety features, such as forward collision warning (which sends an alert to drivers when they’re too close to a vehicle in front of them); adaptive headlights (which pivot toward the direction you’re heading to improve visibility around curves); adaptive cruise control (which “matches” your driving speed to the driver in front of you); and blind spot detection (which provides sensors to warn you about anything that is in your blind spot).

Used: Some of these features also will be available in late-model used cars, depending on the make.

SALES PERKS

New: Manufacturers are throwing in more perks for new cars, such as free maintenance for a certain period or roadside assistance.

Used: For CPO used cars, an extended warranty may be available. But with other used cars, you’re usually on your own, although roadside assistance often is available from your insurer or automobile club. 

‘IN-BETWEEN’ CHOICES

There are two categories of used cars which mitigate some of the disadvantages, although they also diminish some of the advantages. CPOs generally are late models with low mileage and no history of damage. They are subject to a rigorous inspection and often come with an extended warranty and some new-car perks such as special financing and roadside assistance. However, all of this comes with a price, meaning CPOs will be more expensive than a typical used car.

The other category is the demonstration model—one that has been used by the dealer for showroom purposes but has no previous owner. These “nearly new” purchases cost less than “completely new,” but offer virtually the same advantages.

Start your online search today through the NEA Auto Buying Program. By taking advantage of a car buying service, such as the NEA Auto Buying Program, you’ll find great, hassle-free deals on new and used models from TrueCar-screened dealerships near you before you ever head to the lot. Pick out your car and go the dealership with a price already in hand.

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