I think this is a question that everyone asks themselves at some point in time, “Should I buy a new car or a used car?” In this post I will break down the pros & cons of both to let you decide.
That New Car Smell
There is something about a new car that appeals to us. The fact that it has never been owned, that it is the latest and greatest, that it has a manufacturers warranty, and let’s not forget that “New Car Smell.” While this is all true, I don’t think it is enough to make someone buy one. The truth be told, a new car loses 10-15% in value each year and up to 70% of its value by the 5th year. To test this, I went to Craigslist.com and typed in a 2005 Chevy Tahoe and found that there was one for sale for $13,500. Then I went to Autotrader.com and typed in a 2010 Chevy Tahoe and the cheapest one I could find was $41,000.
This is a $27,500 depreciation in 5 years which comes out to about 67%!
So while buying a new car may seem like a good decision, it is very costly. Now, if you have no debt and make $200,000 per year, then this really wont impact your net worth much. However, if you have a mortgage, or carry debt of any sort, and make less than $125,000 per year, then you might want to think twice about buying a new car.
Buying a New Car Versus a Used One
Now, you might be thinking, ‘That is great to know but what about all of the repairs that you will have to do on a used car?’ Well, I am glad you asked.
Let’s say you paid cash for the 2005 Tahoe. If you were to own the vehicle for another 5 years, it would have to cost you more than $5,500 per year in repairs to be in a worse position then buying it new ($27,500/5 = $5,500). I don’t know about you but I have NEVER paid $5,500 for repairs, not even over a five-year time frame.
So if you intend on purchasing a used car soon, here are 3 things you can do to ensure the lowest repair costs on your used vehicle:
1. Buy from someone who keeps good records
The best thing to do is to buy from someone who has taken good care of their car. Generally speaking, because they took good care of the car, it should have less future repairs than a car that has been trashed.
People that take good care of their vehicles, tend to keep all of there records. Make sure to ask for these when buying a used car so you can know exactly what has been repaired on that vehicle.
2. Make a cash offer that is respectable
Take the car to a mechanic and have them do a diagnostic to see if there is anything that needs to be repaired on the car. If there is, subtract that amount from the asking price and the seller should be willing to accept if they hadn’t already factored that into the price.
Many people use Kelly Blue Book or Edmunds to find out the current market value of a car. In addition to this, I tend to use Craigslist as a resource to see what cars are actually listed for. Sometimes there is a big difference between what Kelly Blue Book says a car is worth and what it will actually sell for.
For instance, if gas prices are high, cars that get good gas mileage are highly sought after. So people will tend to pay a little more for those vehicles because they will actually save money on a monthly basis.
3. Buy parts yourself online or at a local parts store
Repair shops generally put a mark up on these parts and you can avoid this by just purchasing them yourself. You might be saying, “How do I pay for these repairs when something inevitably happens?” I recommend you have an emergency fund of at least $1,000 to start.
That way if something happens, you will have enough to fix most repairs. A fully funded emergency fund should be 3-6 months of your expenses and I will talk about that in my next post.