Is the new car smell wafting down the street from the local car dealer, tempting you to trade in your old model and purchase a new one? That intoxicating aroma is powerfully tempting – but before you succumb, think about the costs associated with a new car and whether a slightly used car may be better for your budget.
Aside from price, here are other financial concerns to evaluate:
- Depreciation – The "new car premium" is the immediate depreciation of a new car as soon as it is driven off the lot – generally around 10% -15% of the cost. In essence, that first segment of depreciation is the difference between wholesale and retail cost of a car. You are paying for the privilege of being the first to drive it.
The typical depreciation rate is 20% over the entire first year and 15% of remaining value in succeeding years, but different models depreciate at different rates. Online depreciation calculators can help you determine the difference between models. You can also look up the values directly on sites like Edmunds and KBB (Kelley Blue Book).
- Taxes, Fees and Insurance – Taxes on new cars are significantly larger than taxes on used cars. Yearly property taxes should also be lower for used cars since taxes are directly related to the value of the car.
Fees for new cars are generally higher as well, but that may depend on where you buy. Fees range from registration, title, and license fees to dealer prep, destination and delivery, advertising, and floor plan fees. Make sure all fees are included and explained as you compare options.
Insurance costs should also be lower since replacement and repair costs for new cars are greater – unless the newer car has features compared to the older car that reduce the overall risk.
- Available Credit – Are you in a financial position to buy a brand new car? If you have other large expenditures coming up such as a home purchase, your collective debt load may make it more difficult for you to receive financing.
Even if you are in a good financial position, would saving or investing the difference be preferable?
- Reliability – Ask yourself why someone is selling a relatively new car. Do they need the money for other things, are they upgrading, or is there potentially something wrong with the car? Repairs could negate your purchase savings.
Have it checked out by an independent mechanic, especially if you are buying from an individual and not a dealership. A CARFAX report is also useful to check for accidents, flood damage, or other mishaps.
- Durability/Warranty – The possible downside of a used car is repairs and/or warranty issues. Several online sites offer reliability data, although with a newer car model, such data may be sparse. Check any remaining warranty on the car to see if it is transferable, and if not, what warranty options you have.
Edmunds has a True Cost to Own® calculator on their website that incorporates all costs such as insurance, taxes, gas costs, repairs, and maintenance. This may vary based on the owner’s driving record and habits, but it is a good starting place.
If you must buy relatively new, at least consider discounted program cars or showroom models. These have been driven for limited miles by the dealership and most come with a continuation of warranty.
Ultimately, you have to decide whether the new car premium is worth it to you. But remember: you can always buy a pre-owned car and use a fraction of the savings to buy a can of "New Car Smell" from the auto parts store.