My wife and I have just purchased our first house, and with that comes the need for a second car. We’ve done our research and know which cars we like. The issue that we keep facing is whether to buy that car as a new car (with zero per cent financing over five to seven years) or to buy that same car as used for considerably less (but higher interest rates and shorter lending period).What we’ve figured out is that to finance the car over seven years with 0-1 per cent interest rates, we’re in the $340 range. To buy a slightly “better” car that’s three years old, over four years with a 5 per cent interest rate, it works out to be slightly higher per month at $400, but we own the car sooner – although we’d likely incur additional maintenance charges with the used car. If monthly budget and long-term investment are our highest priorities, which is the better option for us? – Dave and Julia
You’ve narrowed down the car you want, but you’re torn between financing a new or gently used model. The monthly payments are in the same ballpark ($400 for used versus $340 for new), but you’ll own the used model after four years, whereas the new car payments will last for seven.
On balance, the new model will cost nearly $10,000 more to purchase than the three-year old car you’re considering.
As enticing as new-car smell can be, depreciation is a killer (15-20 per cent per year) in the first few years. With a new vehicle, you’re also paying more for the peace of mind that comes with a full manufacturer’s warranty, though big-ticket repairs such as engine and transmission problems don’t typically tend to occur in the first few years of ownership.
At first glance, it seems that buying a used vehicle in near-new condition and saving yourself a chunk of money is the answer. Or is it?
In the case of a used-vehicle purchase, I’d advise you – or anyone – to stash some cash in a contingency fund each month to cover any off-warranty repair surprises. Depending on your financial situation, creating this buffer might not be a viable option. One way to reduce your monthly used-car payment (and free up some cash for a repair fund) may be found in sourcing a lower interest rate loan via a bank line of credit. This way, you’d also have the negotiating power and discount that comes with paying “cash” for the vehicle.
Another important factor to investigate before making a decision is the insurance cost for each model. New cars are often more expensive to insure.
It comes down to your budget, and after that, personal preference and comfort level. Have a chat with your bank, perhaps you can find a lower interest rate and thereby reduce the monthly payments on the used car, and put those savings into a repair fund. If so, buying a used car in excellent condition is, overall, the most cost-effective route. Considering that you already have one car on the road and you just purchased your first house, preserving funds may well be top of mind.
If you can’t come up with extra funds to stash for unexpected repairs on a used vehicle, or you don’t want to live without the peace of mind which accompanies a manufacturer’s warranty and knowing your full vehicle history, you must decide if a new model is worth the higher purchase price. The value gained from long-term use will help balance out the depreciation factor, but of course you’re still paying a higher overall cost.
If it turns out that a new vehicle is the best option, the good news is that fall is the ideal time to shop around. As the 2013 stock arrives, dealers are offering attractive incentives to unload current year-models.