Owning a car in the United States is like owning your own lungs and liver. Pretty much everyone has the need to own a car at least for a while in their life. Usually, a handful of cars are owned throughout our lives. We get our first car in high school. We might then be carless during college and buy another rig after graduating. Or maybe you're lucky and have the option of not owning a car for the last ten years like myself. Whatever the case may be, purchasing a car is pretty much inevitable.
When faced with the decision, there are a thousand variables to decide between. Should you buy new? Should you buy used? Should you lease? Four doors? Five doors?! All-wheel drive? Sunroof or moonroof or no roof? The list goes on. To answer these questions, you should think about what you'll use your car for 95% of the time. Are you actually going offroading frequently to go camp out in the woods? Then a Jeep may be your best bet. Are you going to and from work every day with little weekend trips here and there? If so, go for something with better fuel economy that's easy to fit into slim parking spaces.
I know, I know. You really want that full size SUV for that one camping trip you always take every summer, but do you really want to spend the other 51 weeks of the year getting 15 miles per gallon instead of 30 or even 40?! No you do not. That would be like if gas prices doubled today, forever.
So now that you're ready to buy a practical car, let's look at the reasons buying why used is almost always better than new.
In the first year of buying a new car, you lose 22% of its value. That $20,000 car is now worth $15,600. Ouch. If you're making car payments, you probably owe more than it's worth at this point. But it doesn't stop there. After five years, on average, it will be worth less than half of what you paid for it.
Picture it like this: You're standing on the lot of all these shiny new cars. Zero miles on the odometers. Feature lists for days. Then someone walks up to you and offers you $10,000 if you decide to buy the same car, but from the 2010 model. And if you're an average car-owner, this will happen once every six years. That's a lot of money you could have otherwise put into an index fund to help you retire earlier.
If you found a car on Craigslist and paid for it today, you would end up paying zero interest rates ever. On the other hand, if you got your car from a dealer and opted for a 5-year car loan, you would pay an additional $2,000 on a $30,000 car. Want to spread it out even more with a 7-year loan? You're wasting over $5,000 in financing charges. That's $5,000 you just put in a box and lit on fire. If you were savvy and put that money instead into an index fund, you would be looking at $10k in ten years. If you're curious about investing and index funds, I highly recommend reading this post I wrote about getting started in the stock market.
Besides the waste of money that financing is, it's also an emotional constraint. For the next five to seven years, you'll constantly be thinking, "I can't rent an apartment for more than $XXX because I'm paying $500 every month for my car." If you had saved up the much smaller amount to buy a used car outright, you wouldn't have to factor in these adjusted living constraints you put on yourself.
New cars are worth more and therefore come with much higher insurance rates. On top of that, you will be more of a target for breakins. With older, used cars, collision and theft can be completely dropped from the insurance if you so please.
Do Your Homework
While buying used has a lot of financial benefits, you should be aware of some of the disadvantages. Because any used car has some wear and tear, you're going to have to deal with maintenance sooner. Choosing an automaker that is known for reliability and longevity is paramount. Cars from Toyota, Honda, Ford, Dodge, and Chevrolet are especially known to keep their value well. Some lasting up to 200,000 miles.
Another nice perk from buying new is the warranty. Most new cars will come with a warranty for the first couple years. This could save you a nice chunk of change if anything goes wrong early on.
For some people, a new car will be the decision they feel best about, but even buying a car that's just three years old could save you a lot of money overall. It will still run like a champ without losing that 30-40% of value in the first couple years.