Automobile Purchases

What are the pros and cons of buying a new car versus a used car?

Advantages of buying a new car:

• If you keep your cars longer than the average 4- to 6-year duration, new cars make more sense since they will last longer than a used car.
• With new cars, you have many choices when it comes to picking options. Used cars come as they are.
• New cars come with full factory warranties that offer broad coverage. Used cars tend to have limited warranties. New cars also have lemon law protection.
• Used cars require more maintenance than new cars.
• You can generally get longer-term financing at lower interest rates for new cars.

Advantages of buying a used car:

• Used cars tend to cost less to purchase than new cars.
• Used cars tend to cost less to insure than new cars.
• Used cars experience less depreciation than new cars. New cars dramatically lose value in the first 2 years of ownership. If you buy a car that is already 2 years old, you still get a fairly recent model, but the initial owner was the one who absorbed the largest depreciation the car will experience.

What considerations should I have when financing a car?

You can finance both new and used cars, and you can get a car loan from either a bank or the dealership you buy the car from. Interest rates tend to be lower on loans for new cars than for used cars. Banks tend to offer better rates on car loans than dealerships do. New cars can be financed for longer terms than used cars.

When financing a car purchase, a good rule of thumb is to make a down payment of 20 percent or more on a loan for no longer than 4 years. The longer the term of the loan, the lower your monthly payment, but you do not want to eventually end up owing more than the car is worth.

If you plan to finance a car, get a loan in place before you visit a dealership. It will give you leverage in negotiating a better rate on a loan with the dealer.

When does it make sense to lease a car?

The amount of a lease is determined by the difference between the value of the new car and its projected value at the end of the lease, or residual value. Leasing deals generally offer lower monthly payments than loans. Leasing a car instead of buying one makes the most sense for someone who puts few annual miles on a car. Most leases require that you drive fewer than 15,000 miles per year or you are charged a fee for every mile over the limit. You may also be charged for wear and tear on the car.