Is It Ever a Good Idea to Buy a New Car?

Dark car park entrance exit

I feel like I need to whisper this to you in a dark parking garage with my face obscured by shadows, but, “I’m a financial advisor who buys new cars.” And I will argue that, yes, sometimes buying a new car is a good idea despite the many financial pundits that will tell you purchasing a new car is one of the worst financial mistakes you can make. Here are the top five reasons you should consider buying a new car instead of one that is used.

Getting Exactly What You Want

Have you ever found yourself wandering the aisles of a used car lot or scouring a website searching for the perfect car? Rarely do you find exactly what you’re looking for. One car has every feature you could dream of, except it has a metallic-mustard paint job. Another vehicle is perfect in every way, except your history of backing into poles makes the absence of a backup camera a non-starter.

Buying a used car is often filled with compromises. However, if you decide to buy a new car, you can have it delivered the exact color, and with the exact features, you desire. Some of these choices can also save you money. Buying a used car can result in being stuck with expensive options you don’t necessarily want.

My last car-buying adventure was eight years ago. Three decisions I remember clearly were All Wheel Drive (AWD) or Rear Wheel Drive (RWD), standard or automatic transmission, and whether I needed a navigation system or not.

I bought a new Lexus, and the experience is still fresh in my mind. One feature I was happy to skip was the navigation system. I remember staring at the price tag and then my phone. Price tag. Phone. I couldn’t justify the price versus the free navigation system in my hand. Thank you, Google! I’m not sure exactly how much I saved in 2012, but if you decide to skip the navigation system on a new Lexus IS today, you’ll save $1,670.

Most of the cars on the dealer lot had AWD. Safer? Perhaps, but also more expensive. I could have saved approximately $2,000 by selecting a RWD car. For someone who has a short, or no (thank you coronavirus), commute, and rarely needs to drive in poor weather, this option could be attractive.

My first car was a 1976 White Datsun B210, and it had a stick-shift. I still have an affinity for manual transmissions and only recently bought an automatic.

Stick shifter in black and white

You can save between $1,000-$2,000 by going old school. Unfortunately, the stick-shift is dying out, but it’s another example of a feature you can select in a new car to lower the price.

There are dozens of places to save money on a new vehicle. Don’t like leather seats? Order cloth. Would you be happy with a 4-cylinder? Downgrade from the V6 engine to save money. Not everyone wants a moonroof. If you can do without, you might be able to save some money.

All of these extras add up, and if you are buying a used car, you will be stuck with the features already decided for you. If you order a new car, you can drop unwanted options and potentially save thousands of dollars while getting exactly what you want inside and out.

A caveat here is if you strip out options that everyone else wants, you’ll likely get a lower price when you sell your car. However, if you’re like me and you plan to drive your new car for a dozen years or more, this will matter less. And if your new car is perfect in every way, you’ll be less likely to begin eyeing up the new models after a few years.

Technology

The speed of technological advances is accelerating in society, and new cars are no exception. There may be advanced features on the latest model that are absent from older cars – technology that is important to you. One area of emphasis is safety. New technologies include lane-keep assist and automatic emergency braking. If this is a brand-new feature and you want it, buying a new car is the only way to go.  

Is parallel parking the bane of your existence? Would you rather walk three blocks to pay a valet $30 to avoid parallel parking for free in front of a busy restaurant? Self-parking technology alone might be worth buying a new car if older models don’t have it. There are many features that may make purchasing a brand-new car attractive depending on the model you’re considering. 

Low Interest Rates

The average credit score in the U.S. has been around 690-700 over the last 15 years. And according to Bankrate, the Annual Percentage Rate (APR) people pay for a new car with a score in the range of 661-780 is 4.68%, versus 6.04% for a used car.

As reported by Edmunds, the average length of new and used car loans have increased over the last decade to 72 months. Let’s take a look at the overall cost difference of buying a new versus a used car.

The best-selling, non-pickup truck for 2020 is the Toyota RAV4. Using pricing and depreciation data from Caredge, I calculate the total cost with a 72-month loan to be $34,094 for a new RAV4 and $30,998 for a one-year-old model. That’s a difference of just over $3,000 for the six-year length of the loan.

White Toyota Rav 4

The loan’s overall cost for the used RAV4 was lower due to a lower purchase price, but the used car owner paid over $600 more in interest charges due to a higher rate. Always keep in mind that the APR difference between new and used has a cost.

If you have excellent credit, there are often opportunities throughout the year to get an even lower rate. For example, Toyota is offering 0% APR, as I write this article, for 60 months and 2.9% APR for 72 months. You won’t often see rates this low on used cars. Just remember to always check the fine print on any loan.

Negotiations

This may be the best reason of all to buy a new car. It’s not a monetary win, but there is a tremendous value gained by not having to haggle with a used-car salesperson. I have accompanied several friends to buy a used car and my experiences, unfortunately, matched the used-car salesperson stereotype. I sat through high-pressure sales, a focus on payment and not price, and frequent huddles with the manager.

The difficulty of negotiating the price of a used car is – no two are alike. Options, condition, and mileage differ between every vehicle. These differences put you at a negotiating disadvantage.

The beauty of negotiating for a new car is each one is identical. Yes, options can vary, but each car you purchase should be in showroom-floor condition with a handful of miles. And if you can’t find a vehicle with the exact options you want, you can order a new one from the factory. This uniformity allows you to more easily negotiate the price of your new car with several dealers.

Not a fan of the negotiation process at all? Let me introduce you to the Internet Sales Manager. Without even stepping into the dealership, you can get the price for the car you want simply by sending an email. Contact several firms that each have the same car (or can get you the car), and lower your price by having them bid against each other. Only when a price is finalized will you have to stroll into the dealership – your negotiations complete.

Admittedly, you can also negotiate used-cars by email. However, negotiations tend to be more difficult when you’re not comparing apples to apples.

Private Sellers

If you plan to buy a used car from a dealer, this won’t apply to you. However, to get the best price on a used car, you’re going to have to buy it from a private seller.

Safety is always a concern when buying a car from a private seller. A dealership may have its faults, but worrying about your security isn’t one of them. There is no telling who is on the other end of a private sale.

A man in a gray suit menacingly points a banana

You’re also going to have to take care of the transfer of ownership paperwork and complete it yourself. The details for each state will vary, but most involve some legwork. In Pennsylvania, you will need to take a trip to the Department of Transportation as an agent will have to witness the transfer.

When you’re buying a used car from a private seller, you have little recourse if it turns out to be a lemon. You want to have it inspected by a mechanic you trust and ask a lot of questions about its history. Obviously, this involves time and money.

Is a new car from a dealer looking better to you now? You can avoid most of the private seller headaches by purchasing a used car from a dealer, but you’ll pay extra for the privilege, and the spread between new and used car pricing will narrow.

Summary

Don’t immediately assume a used car will be the right choice for your next car purchase because that’s what you’ve heard from the experts. Investigate the used-car inventory in your area. Compare new and used-car pricing. Then compare these options with ordering a car from the factory with precisely the features you desire. Weigh the differences in pricing, interest rates, technology, and your comfort level with negotiations to make your final decision. You may find that by cutting a feature you don’t want, sticking with a car that depreciates slowly, and scoring a low interest rate, a new car will be just as, or more, attractive than a used car.


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    Financial Advisor David Tuzzolino

     

    David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.