Choosing between buying a new or used car may not be as simple as it seems. Find out what matters beyond simple sticker price.
Comparing the cost of new and used cars
[Visual of Title: Comparing the cost of new and used cars]
When you’re getting ready to buy a vehicle, one of the first questions to answer will be: new or used?
[Visual of dashboard gauge pointing towards two cars, reading “New” and “Used”]
A used car will often cost less than a new one. But a new car may be more reliable and have fewer unexpected repairs that can impact your schedule and budget.
For this example, let’s take a look at two mid-size cars—one new, and one used—and then compare and contrast all the variable expenses you might encounter with each car over the next five years, like the cost of the car, the cost to finance it, the cost of gas, insurance, and finally maintenance and repairs.
But first, let’s start with the cost of the actual mid-size car.
So over here, let’s say we have a brand new car with a sticker price of $27,500…and over here, we have a used car that is the same make and model as the other one, just five years older, that we found for sale by its owner for $10,000.
Now you may be wondering, why is the used car so much cheaper than the new car? There are a couple of factors.
[Visual of new car with “warranty” spotlight on it]
One is that the new car comes with a warranty, which will cover most repair expenses in the first years of ownership.
[Visual of new car sitting on a graph that reads “0 years.” The car begins driving down the line as number of years increases. When the car gets to 5 years, it reads $10,000.]
But the biggest factor in the price difference is depreciation. As a car gets older, it loses value, that is, it depreciates.
So this new car that cost $27,500, after five years might only be worth about $10,000, even if you’ve kept it in good condition.
[Visual of car driving down the line to 10 years, it reads $5,000.]
And the same car might only be worth about $5,000 in another five years.
As you can see, depreciation doesn’t happen at a constant rate.
Sure, it’s almost always going to go down, but a new car loses value fastest the moment you buy it, but then slows to a more constant rate after the first few years.
If you plan on driving your car until it falls apart, depreciation won’t matter as much because you’re not going to resell it. But if you plan on trading it in, or selling it after five years, it can make a big difference. In five years, your new car might be worth about $15,000 (estimated) less than what you initially paid. And with the used car, your car might only be worth $5,000 less over 5 years.
Now, let’s take a closer look at some other key differences, starting with the financing.
[Visual of man standing next to used car with Bank and Credit Union in the background]
Most car buyers finance through their dealership. But, you can also purchase from an individual owner through a bank or a credit union using a private-party loan. However, when you purchase a used car, you’ll likely get a higher interest rate than when you buy a new car.
So, let’s say the annual percentage rate, or APR on a five-year loan for the new car, is 3.5%. And the APR on a loan that you get for the used car could be something like 4%.
Using an online loan calculator, you’ll find that on the new car, you’ll be paying about $30,000 over five years—that’s $27,500 in principal and $2,500 in interest, with monthly payments of about $500.
On the used car, you will pay about $11,050 over five years: $10,000 in principal and $1,050 in interest, with monthly payments of about $185.
So even though you have a higher interest rate on the used car, you’ll pay less in interest, and in monthly payments, because your principal is much less on the used car than on your new car.
[Visual of cars side-by-side with gas mileage sticker above them reading “33” and “29.” A gas sign pops up in middle reading “Regular 4.00”]
Next let’s compare gas mileage. Let’s say the new car gets 33 miles per gallon and the used car gets 29 miles per gallon and you drive about 15,000 miles per year. Let’s also assume that gas will be a constant $4 per gallon.
Over five years, taking the miles driven, divided by the miles per gallon, times the price of gas per gallon, you would be spending about $9,100 for gas for the new car, and about $10,350 for gas in the used one.
Then there are insurance rates to consider.
[Visual of “Auto insurance” bubble in middle, with other bubbles appearing with wedding rings, elderly sign, city and rural icons, and sports car vs. sedan]
Insurance rates vary based on a lot of different factors, but in looking at new versus used, the variable with the most impact will be the replacement cost of the car. The more valuable the car, the higher the insurance rate. So while a new car might get you some discounts for new safety features, generally a used car that’s less valuable is going to cost less to insure.
So with a new car, your insurance might cost $1,560 a year. Over five years: $7,800.
And with a used car, your insurance might cost $1,200 a year, and $6,000 over five years.
Now let’s look at maintenance and repairs. This is the trickiest cost to estimate because it’s unpredictable and major repairs can have a big impact on your budget.
With a new car, major repairs may be covered by a warranty in the first few years. So let’s estimate that over five years you spend $3,000 total on maintenance and repairs on the new car.
Now, when you buy the used car, you do have the option of buying certified pre-owned. This will cost a bit more, but it’ll also come with some sort of warranty.
But for this example, let’s go ahead and assume the used car is not covered by a warranty.
[Visual of new and used cars driving on two lines going upward. Check Engine light appears.]
The cost of regular maintenance typically increases as the car ages—and so does the chance of needing a major repair. Major repairs can be inconvenient too—they take time and sometimes you might have to get a rental car while yours is in the shop.
For the used car, you might be lucky and only need to spend around $4,000 on maintenance, but a more realistic number may be around $6,000 on the used car.
So, adding this up, you’d spend a total of $49,900 on the new car and $33,400 on the used car over five years. That’s a difference of $49,900 minus $33,400, or $16,500. Now, keep in mind, this doesn’t take into consideration the value still in the cars. The new car probably has a few more years left in it. So if you were to resell them, you’d be getting around $10,000 for the new car, versus, say, just $5,000 for the used vehicle.
But we’re looking at a lot of variables after all. With certain cars and situations, the new one may end up costing you less than the used one. And there are multiple other things to take into consideration.
[Visual of new car with green leaves appearing above it. Used car appears with dollar bills appearing above it.]
A new car will probably be more reliable, with newer features and it may be safer or better for the environment. With a used car, you’ll have lower monthly payments, which could be good for your budget, but it may also be less reliable and you could have larger unexpected costs when it comes to repairs.
By looking at your own needs and budget, and doing the research and the math on the cars you’re interested in, you can figure out which is the best choice for you.
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The material provided on this video is for informational use only and is not intended for financial or investment advice. Bank of America Corporation and/or its affiliates assume no liability for any loss or damages resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. © 2021 Bank of America Corporation.
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