The total cost to own a car is generally at the forefront of the thoughts of many financially-savvy consumers. This cost includes not just the monthly payment, but , , , and depreciation. In the past, conventional wisdom has stated that buying a is always the most frugal option. But with rising prices in the auto resale market, much more fuel efficient new cars, and better warranties, you may be better off buying a new car instead.
When we look at real-world factors, they also tend to favor the purchase of a new car over a used one. AAA produced a survey a couple of months ago illustrating the impact of the tough economic environment on car owners. The survey found that 1 in 4 American car owners could not afford to make an out-of-pocket car repair of $2,000. Also, more than half of American drivers said they are holding onto their older vehicle because they do not want the financial burden of a new one. Yet, one quarter of drivers admitted to neglecting repairs and maintenance on their vehicles in the past 12 months due to the economic climate, which AAA experts say can greatly increase the likelihood of their car needing a costly, major repair.
What’s even more damning for used cars today is the price. Edmunds, the used car experts, estimates the average price paid for a used, three-year old auto has risen over $1,400 (8.5 percent) since last year, reaching nearly $19,000. Edmunds believes it’s a combination of bargain-hunting consumers and the rise of certified pre-owned car sales at dealerships that’s partially responsible for the rise. “Used cars are in great demand and relatively short supply, so their prices are remarkably high,” stated an Edmunds analyst. Fewer cars are entering the used market because people are holding on to cars longer. And because of the decline in sales of new cars in the previous years because of the recession, there are fewer used cars in circulation now. So it’s a case of supply and demand.
This is great news if you’re shopping for another vehicle because in general, if you're thinking of selling your current car privately or trading it in for a new model, you can expect to get a higher price now than you could in past years. So few used vehicles are on the market today that prices have risen to their highest in 16 years, and dealers are paying an average of almost $12,000 for a used car or truck, up almost 30 percent since December 2008. But one car segment that has seen a continued decline is gas-guzzlers, which is comprised of full-size SUVs and pickups. These types of vehicles have declined 5 to 6 percent on average, so car shoppers trading these vehicles may be faced with negative equity.
So this brings us to the “New” vs. “Used” conundrum. If the prices of a new and a used model are only a few thousand dollars apart, then all things considered, you’ll have to go with the . You’ll get a better warranty, better fuel economy, and the peace of mind of knowing that it’s been maintained throughout its lifetime, which is a big deal. You also have to factor in the fact that you’ll pay about one percent less interest on new car financing as opposed to used car financing. Plus, if high used-car prices continue, it will mean that the depreciation hit you’ll take will be lower when you decide to trade or sell later. In my opinion, that makes buying a new car over a used car a no-brainer.