Wondering should you buy new or used cars? I’d like to show you our own history with buying used versus when we bought new to help you decide.
Should you buy new or used cars?
For us, I can easily and decisively say that all of the new cars we purchase in the future will be used.
In fact, all of the cars I’ve ever purchased in my entire life have been beater cars – only recently did we purchase a moderately-priced used car with 66,000 miles on it (the least amount of miles I’ve ever seen!).
But perhaps you’re used to having a monthly car payment. Or perhaps you’re very concerned about your car’s reliability, and certain that a used car will break down on you.
Let’s discuss a few reasons why you want to buy used instead of new, with a few digits + personal experience to back it up.
Psst: you'll definitely want to check out our update, where we became a one-car family for 2.5 years!
Vehicle Purchase as a Percentage of Income
My father has always told me that a car is meant to get you from Point A to Point B. That is sound advice. The purpose of a car is not to be an extension of our homes (although we are spending much longer commuting than we used to), to show off to coworkers and friends, or to produce concert-quality music through the speakers; the purpose of a car is to safely deliver you to your destination.
Just to strengthen my resolve in not wishing to purchase a new vehicle, I have researched new car prices and its percentage of household income in the United States, versus used car prices as a percentage of household income.
Below I’ve listed the top 5 selling cars for 2017 as well as their MSRP price. The list is a little vague in specific car (for example, what bells and whistles were included?), so I chose the lowest priced car in each category I could find.
- Nissan Altima ($22,500)
- Honda Accord ($22,455)
- Toyota Corolla Sedan ($18,500)
- Toyota Camry ($23,070)
- Honda Civic ($18,740)
The median household income in the United States in 2017 was $60,336. That means that the least expensive car listed above (Number 3 at $18,500) is 30.6% of a household’s annual income, pre-taxes.
Over 30%! In case you weren’t aware, this is the MAXIMUM amount of your income you should be spending on your housing, not on a vehicle.
The most expensive car in the list (Number 4 at $23,070) is 38.2% of a household’s annual income, pre-taxes. Since most people do not purchase their cars in cash, let’s take a look at the percentage of household income on a monthly basis – because that really means something to us, right? Using the median income minus 15% for federal taxes, monthly take home pay comes to approximately $4,273.80 (this will vary by household and state). An estimated monthly payment on the cheapest car above at 4% interest for 36 months is $546. This is approximately 12.8% of the median monthly budget. The most expensive car on the list at the same loan terms would be at $681, or approximately 15.9% of the median monthly budget.
And guess what? This cost doesn’t include the gas you need to put into the car, the insurance you pay each month (and this will be higher than a used car), or any other maintenance.
Now, what if you spent just $7,000 on a used vehicle, with 66,000 miles on it (this is what we paid for our 2009 Ford Focus last year)? Now you’re looking at jus 11.6% of your household income (and if you paid it off monthly, instead of in case, you’re looking at a monthly car payment of just $207, or just 4.8% of your monthly cash flow.
That’s close to Financial Samurai’s 1/10th rule (limit your vehicle purchase price to just 10% of your annual gross income for radical wealth growth).
That leaves a lot more room to save for retirement and other pursuits!
Disadvantages of Buying a New Car
Most people understand the advantages of buying a new car – that you’ll look great driving it around, everything works, you likely have many, many miles to go before you need to do serious services to it, and you have greater reliability.
So, let’s instead focus on the disadvantages of buying a new car.
Disadvantage #1: You Take the Car Depreciation Hit
With a used car, the first owner takes the most of the car depreciation hit. But if you are the first owner…well then, you’ll have to just take this one on the chin. Most cars depreciate in value the moment you start driving them on the highway by an astounding 10%, followed by another 10% in the first year alone. CarFax reports that you typically lose another 15-25% in value each year, over the next four years.
Hint: It’s a great idea to be on the buying end after all that depreciation has come off!
Disadvantage #2: You’ll Likely Take on a Loan
If you can pay for your new car in cash, then my hats off to you! That is great. But most people will need a car loan to cover the cost, which means they’ll not only have to pay interest on top of the cost, but they’ll have to insure the care with full coverage (which costs more).
Not to say that you shouldn’t use comprehensive insurance; but it’s nice to have the choice if you want to instead of it being stipulated because you don’t technically own the car (the bank does).
Disadvantage #3: Higher Insurance Costs
Speaking of more insurance costs, your plan will cost more anyway because there’s a direct relationship between the value of your car and the insurance premium you’ll pay.
Psst: live in a flood-prone area? Here's our experience with two car flooded insurance claims.
Advantages of Buying a Used Car
Now, let’s look at some of the advantages of buying a used car.
Advantage #1: Lower Insurance Costs
It follows that if the value of your car is lower, the cost of your insurance premiums is lower. In fact, you might just choose to self-insure – keeping enough in an emergency fund or car maintenance account in the event of an accident – and just carry liability only insurance to cover you in the event that you injure another person or another car.
Advantage #2: You Don’t Need to Worry about Small Blemishes
With a new car, you’re starting from the best. So, every little scratch or dent is going to be like a punch to your gut. But with an older car? Well, they already have a little “character”. If something else happens that is minor? You probably won’t sweat it.
Psst: here's my one-two punch for how to find an honest car mechanic to work with, something you'll need to do with an older car.
Advantage #3: Lower or No Interest Payments
With used cars, you can either afford to pay for them in cash, or your loan is lower anyway so you’ll be paying less in interest overall.
Is it Worth Buying a New Car? Our Own Experience.
Now I want to share with you our own experience with buying a new car versus a used card.
You see, my husband bought himself a brand-new Ford Mustang in 2007 as his gift to himself for getting out of the Navy.
We paid off the rest of his $22,000 loan in 2010.
The car lasted for 10 years (it would have lasted us longer, but it flooded in a flash flood here in Houston, just three weeks after our other car flooded in Hurricane Harvey).
Here’s some states for you:
- Insurance Cost More: His car cost us more to insure (because it would have cost an insurance company more to replace). Also, since it was not a beater car, we kept Comprehensive Insurance on it (13 actionable strategies for saving on car and other insurances).
- We Paid Interest: I’m not sure how much interest was paid on this car overall. We paid the loan off just 3 years after he got it. His interest rate was at 4.5%, so an estimated amount of interest paid using an online calculator shows $1,559.56 (hint: two of the beater cars I’ve purchased in the past cost less than this).
- We Received an Insurance Claim Payout: Due to the flooding, and due to us having comprehensive insurance coverage, we received around $5,800 check from the insurance company.
- It was a Gas Guzzler: Unfortunately, I have no specific stats to share with you. But I promise you he had to fill the tank up WAY more than I wanted him to!
Given all this information, I can estimate that to run this vehicle, it cost a total of $1,775.95/year (and that doesn’t take into account the extra gas or the extra insurance costs to us compared with a beater car).
Granted, if we could have held onto the Mustang for several more years – which had been our plan – then we probably would’ve gotten that number down some.
So, if you purchase a new car and hold onto it for 15-20 years? Well, now you’re talking. Of course, at that point, you’ll be driving a beater car, anyway!
When you compare this with the beater cars we’ve purchased from between $1,500 – $3,500 that have taken me through the last 16 years…you start to get the picture. Even with extra repairs on the beater cars, I know we’ve come out ahead money-wise with them versus the new car we hung onto for 10 years.
|Car||Cost||How Long it Lasted|
|One of those late 1980s burgundy vans||Free (family car passed down to me)||3 Weeks (oil leaked out and something melted)|
|Buick||$1200||3 years (head gasket blew)|
|Chevy Cavalier||$1500||6 years (transmission)|
|Nissan Frontier||$3500||1.5 years (needed new engine)|
|Chevy Cavalier||$3200||6 years|
|Mitsubishi Lancer||$3500||5 months (flooded, and our insurance claim payment was almost as much as we paid for the car)|
|Ford Focus||$7,200||Still going strong (4 years so far)|
Let’s say we add $3,500 worth of repairs to the amount of cash that I paid for the vehicles above. This comes to a grand total of $23,600, which is approximately $98.33 per month (over the last 20 years).
Since my income has swung wildly from mucking horse stalls to minimum wage to entry-level worker to environmental investigator to full-time blogger in the last 20 years of my life, I do not know what percentage it was of my income; obviously, it's a very small percentage for any person's income.
While owning a used vehicle comes with its own perils — possible breakdowns, not knowing the vehicle’s history, typically no warranty (unless purchasing through certain places), not having that new car smell — it is usually a much cheaper route to get you from Point A to Point B. Because of this, if and when we decide to get our second vehicle, it will be another used car.
Do you purchase new or used vehicles? What has made you decide one way or the other?
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