Maybe you're tired of taking transit, or maybe you have an old car that's on its last legs and you want an upgrade. Whatever the reason, you're in the market to buy a car. Now, should you buy a used car or a new car?
Buying a car is a significant financial decision which will have a large impact on your personal finances, so it makes sense to spend time thinking through this decision. Here's what you need to know:
Pros of buying a new car
Aside from being able to bask in the new car smell and driving a pristine car off the dealership lot, there are a number of other great benefits to buying a new car. The first is that you'll have the peace of mind of the factory warranty should anything go wrong. In two months if your car develops an electrical problem? You'll know it will be covered!
Another benefit is the fact that newer cars have more bells and whistles and that you can customize the cool features your car has included in it when you buy new. Do you want heated seats? You can have them! What about media players for your kids? Those are available on several different models! You also have more control over choosing the colour, the make and model. These options could come at a cost so be prepared for that but depending on your financial situation, this may not be a concern.
Another benefit to buying a car is that you might be able to access better financing rates. Some dealerships offer special rates that let you pay little or no interest on a new car. For example, you often hear of dealerships offering 0% interest financing on new cars. Spring and summer are generally good times to buy a vehicle because there are lots of incentives and programs in the market at that time, but incentives can be available at anytime throughout the year so don’t discredit ‘low selling times’. Summer and fall are often when new models are available if you’re after the latest and greatest.
Finally, buying a car new means you'll know the full history of your car – from the moment you drive it off the lot until the moment you sell it yourself. You won't have to worry about potential cosmetic or significant damage that you don't know about and you'll be able to ensure that you perform all the important maintenance tasks on your car.
Cons of buying a new car
While there are some definite perks to buying a new car, there are also some downsides. The biggest one that you likely have heard about is depreciation. A car loses 11% of it's value on average once it drives off the lot according to Edmunds.* By the time you've paid off a five-year car loan, you'll likely lose far more of the value – about 37% on average. That's a significant downside!
Another downside is that the insurance on a new car is often higher since it has to cover the cost to replace the car at its full value. In contrast, the insurance cost of an older car tends to be less because the value of the car has depreciated.
Pros of buying a used car
The main benefit of buying a used car is the cost of the car. After all, you don't have to deal with hit of immediate depreciation – the car will already have depreciated by the time it gets to you. Used cars are often significantly cheaper than new cars depending on how old they are when you buy them – because you don't pay for the significant depreciation that takes place in the first years.
If you buy a car that has a good resale value, you're likely to be able to maintain much of your car's value while you own the car which means that you could sell it without losing too much of your investment.
Because the car is older, you will also luck out by qualifying for a lower car insurance rate since the replacement value of the car is considerably less.
Some people say one downside of buying a used car is that you may have to pay more in interest when you buy a used car directly from the dealer. But if you buy a used car directly from the manufacturer’s dealer, you may be able to qualify for a lower interest rate via dealership financing in the same way you would be able to get with a new car. Some dealerships also offer extended warranties on used cars or often the car's warranty has not yet expired.
It's also important to note that a lower interest rate doesn't make your loan cheaper or mean you pay less interest over the life of your loan. If you borrow less because your car is used and costs less, you might be able to have a lower monthly payment and pay less in interest over the life of the loan anyways.
Cons of buying a used car
There are a lot of things to consider when buying a used car. For example, you won't have nearly as much choice over the type of car you buy as you would if you bought new. You also won't be able to customize the features. Want a red car? You might not be able to find one in your price range on a model you want to buy at the time when you're shopping.
If the car you buy is older, you also might miss some of the more modern features that are handy like the ability to link your cell phone to the stereo with Bluetooth or even advanced safety features that are more likely to be included on newer cars.
You should also be careful about how many kilometres are on the car you buy since it might be nearing a point where it will need a major repair or have significant maintenance expenses such as new brakes or tires. Before you buy a used car, make sure to check the owners' manual to see what regular maintenance is coming up based on the mileage of your car. You should also get a mechanic to look at the car to make sure there aren't any big problems.
Speaking of maintenance, one downside of buying a used car is that you won't know how well your used car has been maintained over the years. You might find a responsible seller who has kept copies of each and every oil change the car has gotten, but more likely than not you will get a car without that history. If it wasn't properly maintained, that could lead to significant costs down the road.
One downside of buying a used car is that it might make it harder to qualify for financing. That's because an auto lender uses your car as security on the loan they give you for it. Due to depreciation and the complexity of valuing used cars, you might not be able to qualify for a loan for a used car if it's over five to seven years old. You might instead have to take out a personal loan, which isn't secured, is harder to qualify for, and might come with a higher interest rate. Or you might not be able to qualify for a loan at all.
If you intend to buy a used car directly from the dealer, be careful of cars that aren't very old but have a lot of miles on them. They might have been used by rental companies and might not have been properly treated or maintained – which could cause you problems.
What's right for you?
What's right for you will depend on what's more important to you when it comes to buying a car. Do you want something that has all the bells and whistles and which you can customize? If that's the case, a new car might be right for you. If you're looking for something that will give you the best value and will be better for your bottom line, you're likely to benefit from buying a used car. You can always speak to a car dealer before making any decisions.
Whatever you choose, you'll be happy you took the time to think through all the options to make sure that the choice you're making fits your personal and financial goals. Once you have your car, you can redirect all that energy to plotting out the pros and cons of where to go on your first road trip!
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.