Most people believe that buying a clunker and fixing it up is cheaper than just buying a new car. Here’s what financial experts have to say about all that.
Choosing New Vs. Used
Most people intuitively understand why a new vehicle is attractive: it’s new. It smells new, it drives new, there are few problems with it, and the paint looks great.
But, beyond the subjective, what else is there to love?
Plenty.
First, there’s the reliability. If you’re looking at new vehicles, the first thing you’ll notice is that these vehicles come with manufacturer’s warranties. And, today’s warranties are nothing to sneeze at.
That’s the reliability factor. If you’re a busy professional, you don’t want to go into the mechanic’s to have your car fixed. You want to avoid the lost time and wages. When you buy new, you are paying for this kind of certainty.
Another thing you get is a nice vehicle. Buying a car takes an enormous about of time out of your day and probably even weeks or months. If you’re planning on driving it for many years, you don’t want it to look and drive like a clunker.
If you just like driving nice vehicles, then you might end up buying a used car that’s already pretty new, which doesn’t save you much anyway.
Some people like the new car smell you have with a new vehicle. Another benefit is the resale value. When you buy used, a lot of that is gone. Now, to be fair, the reason you have resale value is because a lot of the value is depreciated, meaning you take a hit on the value when you drive it off the lot.
If you’re buying new, one thing to think about is the financing terms. You will likely have to pay a pretty penny for it. Maybe you will finance $20,000 or more. But, that’s what banks are for. If you buy used, you can pay cash, but it’s unlikely that you will get away without having to spend money on repairs.
And, if you are getting financing terms of 2 to 4%, then you’re not going to pay that much to the bank anyway.
Ways To Buy A Vehicle
Regardless of whether you buy new or used, you have options when buying.
Since most people will have to pay for a vehicle over time, you should look at the various ways to pay for it. First, there’s leasing. The average midsize vehicle lease that sells for just under $25,000 with drive-off fees of $1,100 will cost you about $300 per month for three years.
Buying new using bank financing is another way to pay for your vehicle. When you buy the same vehicle, the average down payment on a 5-year loan is $4,104. The average interest rate is about 1.6%, which means you pay about $400.
That’s a big jump in the payment.
Of course, few few people can afford to buy a new vehicle with cash. But, if you can, then that will save you the cost of financing and leasing. In terms of out of pocket expenses, assuming you can’t pay cash, the leasing option costs $4,628 less over 6 years versus buying a new vehicle.
This also excludes the repair costs of the new car.
Other Expenses
There are other expenses you have to take into account with a new vehicle. Most people think that it’s going to be easy going with the maintenance, but that’s generally not true. Owners of new vehicles still have to pay for things like oil changes, new tires, brakes, and keeping the vehicle clean.
Tires on newer vehicles can cost a pretty penny, too. Depending on the vehicle you drive, it could cost you over $500 just for a front set of tires.
But, even if you lease a vehicle, this is a cost you may have to incur.
Leasing Advantages
It’s true that people who lease vehicles have no vehicle at the end of the lease, but they do have the opportunity to purchase the vehicle at a preset price which is often the current market value for the car. The finance company sets up the purchase price for it at the beginning of the lease.
Then, if you want to buy it, you can when the lease is finished.
Leasing protects you from unexpected depreciation. If the market value of your chosen vehicle drops, the drop in value doesn’t hurt you. Likewise, if the vehicle holds its value, you can usually buy it at a bargain price and keep or resell it.
Madison Bell is a working Mom who has her eye on the family finances. She enjoys writing about personal finances and saving money, thinking outside the box whenever possible.
