The Merit of Considering Used vs New
Any decision to buy a car comes with its own inherent set of challenges. But before you jump down the bottomless rabbit-hole of online research, comparison shopping and seeking the perfect financing option, an important question for you to ask yourself is this: new or used?
There is no right answer or wrong answer, there is only the answer that is right for you. That said, the decision to lean more towards used cars is far different from it used to be. Years ago, most decisions to buy used were financially motivated. Nowadays, used vehicles carry their own unique cache and value offering, and are no longer the automotive equivalent of a ‘consolation prize’. In fact, many car buyers prefer to buy used (or pre-owned) vehicles, over new. While their motivations may vary, here are a few reasons that inspire many car buyers to opt away from buying brand new.
We’ve all heard the cliched statement: vehicles lose value the moment that you drive them off of the lot. But how much truth is there to that statement? A lot. In fact, a new vehicle will depreciate by approximately 11% the moment you drive it off the lot. By the end of the first year, that vehicle may have depreciated by as much as 25%. After three years? 46%. And at the end of five years, plan for a depreciation of over 60%.
Let’s think about that. If you buy a new vehicle for $31,000 it will be worth up to $3,400 less by the time you pull it into your driveway for the first time. And by the time you’ve paid off your five-year loan, you may only see it valued around $11,000. With time, the depreciation rate will slow but those first few years of ownership reflect a steady drop. Depreciation can be influenced by the popularity of a vehicle, the ease at which it can be resold and any number of correlated outside influences (fuel prices, seasonality, etc).
Why does this matter to you?
First, think of your car as an investment, and its resale or trade-in value as the return on your investment. The more that you’re able to recoup (whether or not you’re applying it to another vehicle) the better.
Second, recognize that your first few years of ownership will most likely result in your new vehicle depreciating at a faster rate than your payments will reduce the principle. in fact, after owning the vehicle for one year, you may already owe more on it than it is worth.
Buying a pre-owned vehicle diminishes the impact because a significant portion of this depreciation will have been absorbed by the previous owner. A three-year-old vehicle, originally sold for $31,000 could now be valued closer to $17,000. Imagine what that could mean to you, in terms of potential savings.
Lower Insurance Costs
This one requires far less explanation but does tie back to your car’s valuation. Your insurance rates are based primarily on two factors (i) the risk of accident or damage, as determined by your personal driving history and (ii) the amount of financial exposure faced by the insurance company, based on the value of your vehicle. In other words, how much will they have to pay out to fix, or replace your vehicle, should you damage it.
That said, a depreciated vehicle means less financial exposure for the insurance company. Referring back to our ‘three-year-old’ model, it means the difference between having to insure $17,000 rather than $31,000. This will have an obvious impact on your monthly expenses, whether your insurance provider bills on a 6 or 10-month payment cycle.
Vehicle History Reports
Buying a used car is far less of a ‘consumer trust-fall’ than it used to be, thanks to increasing prevalence of vehicle history reports over the past two decades. While reports such as CarFax rely on the accuracy of reporting in order to properly document all occurrences, they provide far more assurance than drivers of the past could have ever expected. Even the slightest visibility of maintenance, accident and repair history helps to create a more informed buying experience
Certified Pre-Owned Vehicles
Some might argue that the term ‘pre-owned’ is nothing more than a semantic tool to remove any past stigma attached to the word ‘used’. This argument loses momentum when faced with Certified Pre-Owned programs (which tend to be offered by most major automakers).
Purchase of a CPO vehicle empowers the buyer with a number of assurances. First, the certification means that the vehicle meets certain criteria in terms of age and mileage. Second, it undergoes an inspection to confirm that any parts that don’t meet factory standards are replaced or refurbished. Third, the buyer receives a clean Vehicle History report as well as extended limited warranties (and added perks, based on the terms of that automaker).
Here’s a point that many of us are guilty of overlooking. Let’s say that each model year delivers approximately 350 new models into the marketplace. For every model year that you’re willing to consider, you increase your selection. If you’re willing to look at vehicles up to three years old, you’ve just expanded the variety of available models from 350 to 1,050. Willing to consider vehicles up to five years old? You have up to 1,750 vehicles to choose from.
Acknowledging that even the small tweaks between model years can make a difference, having a greater wealth of options only helps you to find the perfect vehicle for you.
For an informed buyer, it’s easy to understand the value in considering the purchase of a used (or pre-owned) car. For a less-informed buyer, this exercise only helps to expand their awareness of the options that are available to them.
While buying a used vehicle may not be for everyone, it’s hard to argue their merit. And with vehicle life seemingly extended with every model year, it’s great to see that merit recognized.