People have been debating for years over the opposing merits of buying a used or a new vehicle. Strong feelings can run either way. Regardless of your personal preferences, though, the facts are that buying a used vehicle is almost always going to save you money. The arguments for buying new include having warranties and thus no repair costs. However, when those factors are compared against the very real drop in value that begins when the vehicle is driven off the lot and continues ever afterward, then there is no real comparison.
There are many ways in which you will save money by purchasing a used vehicle instead of a new one. These include the depreciation of the vehicle, the mileage, the insurance, the taxes and the type of financing you may or may not need in order to finalize the purchase. By researching the values of the used cars in your area and factoring in these types of considerations, you can save a substantial amount of money and drive home in the automobile of your dreams.
Depreciation Explained
When you are considering buying a used vehicle versus purchasing a new one, you will often hear the term “depreciation” tossed around. What exactly is depreciation, and why is it a factor in your purchase decisions? Simply put, depreciation in value is the amount of monetary value an item loses over time. For example, when you buy an item for $100, a year later it may be valued at $80. The difference of $20 between the purchase price and the later value is the amount it depreciated, which is one-fifth of the original value.
Not all items depreciate in value, and many items may increase in value over time. However, most vehicles depreciate as they age, unless they are considered highly desirable due to a limited quantity or they possess unique features. Depreciation for cars happens primarily across the board because of age and wear and tear, but other factors also affect the value of vehicles. This accounts for the differing rates of depreciation among specific makes and models of automobiles.
A car’s fuel economy is a decided factor in value because potential owners want a vehicle that receives good gas mileage. The reputation of the vehicle when it comes to dependability and the lack of driving issues are important to consumers, and the changing preferences of consumers over time can also affect the resale value. Other factors are the condition of the vehicle and the number of miles it has been driven.
Data from KBB.com for vehicles for the model years 2007 to 2016 shows an average one-third loss in value in the first year and a halving in value by year four. As cars age, they may require more repairs, but the amount of loss in the first four years of a vehicle’s life far outweighs the typical cost of any repairs for that age of vehicle. U.S. News compiled data from many sources and concluded that even vehicles 10 years old usually lost more in value over the 10th year than their average cost in repairs for that year. Repairs will only be around 3% of the original value of the vehicle after five years, and they increase very slowly after that.
Mileage Milestones
While everyone knows that the amount of miles placed on a vehicle lowers the value, what people may not know is that certain “mileage milestones” also affect the overall value of the vehicle. It is a good idea to think about purchasing a used vehicle after these milestones instead of right before as the valuation figures will often be less afterward. These milestones are also often reflective of maintenance schedules that may require replacement of engine components.
The three mileage markers that have the greatest impact on the resale value of a used vehicle are 30,000 – 40,000 miles, 60,000 – 70,000 miles and 100,000 miles. The 30,000 – 40,000 milestone is the witching hour of your automobile. Many bumper-to-bumper factory warranties expire at either 36,000 miles or three years, whichever happens first. This is the time period in which many vehicles that are leased are returned to the dealer. It is also the time in which the first major maintenance is due above the prior oil changes.
The 60,000 – 70,000 milestone coincides with the second major scheduled maintenance for most vehicles. These updates can be expensive, with replaced timing belts, tires and brakes on the agenda. The third mileage marker is at 100,000 miles. Modern vehicles with these many miles are still in good shape because of advances in technology, but buyer perception has not caught up with this reality. Therefore, the resale value is inordinately affected by this milestone still, and you can definitely negotiate a good price for a vehicle at this mileage.
If you are looking to purchase a used vehicle close to these mileage ranges, be sure to ascertain whether the required maintenance has been accomplished. You will save money not only from the calculated sale value but also from not having to pay for the scheduled maintenance soon after your purchase.
Auto Insurance Rates
There is no doubt that automobile insurance is partly based on the value of the vehicle. While insurance companies love to compile statistics on many factors, the replacement value of the automobile in question is a major component. The less the vehicle is worth, the less your insurance will cost. By buying a less-expensive used vehicle, you may be able to avoid having to utilize a loan for the purchase. If so, you may choose to not include the collision and comprehensive coverage most loan agreements require on your insurance and thus save even more money.
Lower Valuation for Taxes
You can also save money on the taxes owed on your vehicle by purchasing an older, used automobile. This applies to both the sales tax for the actual purchase and any ad valorem taxes that may be taken out either at the time of sale or annually each year after purchase. Most of these taxes are based on the market valuation of the vehicle. Some states require a one-time taxation on the vehicle each time the title changes hands, which is based on the value of the automobile at the time of purchase. Some states charge the owner an annual amount, which will decrease each year as the value decreases.
Financing Decisions
Deciding on how to finance your automobile purchase depends on many particulars. Buying a used vehicle at a lesser price than new may mean that you can pay the full sale price up front, and thus avoid borrowing any funds and paying any interest. Even if you do not have the entire amount, you may be able to pay a substantial amount down and then take out the remainder as a loan. The less amount of money you have to borrow means less interest paid over the life of the loan. If you need financing for your purchase, be aware that many financial institutions will not underwrite loans for vehicles older than five years.
Make and Model Popularity
One more factor to think about is the perceived desirability of the car in question. In other words, how popular is the vehicle in the pre-owned market? The more people who rate a certain make and model as desirable, the higher the value the car will be. Conversely, if not many people are buying that model as a used vehicle, then the value will often reflect that. While reviews for the safety and dependability are the most common factors that influence this popularity, it is also driven by more subtle aspects that have nothing to do with the real attributes of the vehicle.
There is no doubt that you will save money by choosing to buy a used vehicle rather than a new one. The fact that you instantly start to lose money seconds after the purchase of a new car is the biggest reason, and it trumps other factors like sale specials, rebates, special financing and other discounts. You will save money even if the vehicle is 10 years old, but you will especially save money in comparison to new if you purchase one that is between one and three years old. This is because of the higher drop in value that takes place in those years.
Buying an automobile is a decision that requires careful thought and planning, and by researching the benefits of buying used, you will undoubtedly find this is a great choice.
