I don't know what it is, but there's something really exciting about being the first person to own a car. Maybe it's because brand new cars come with the latest technologies, extremely low mileage, and that new car smell you just can't duplicate. Plus, there are no animal crackers stuck between the seats from the previous owner's three-year-old.
But these aren't the only perks of buying new.
Unless you have the misfortune of getting stuck with a lemon, new cars typically have fewer maintenance problems, too. In most cases, you don't have to think about replacing the brakes, tires, or other minor repairs for at least a few years. If you run into some defect, most car manufacturers offer a three-year limited warranty, which provides added peace of mind. Additionally, if you're financing, banks usually offer lower interest rates on newer cars. For example, Toyota sometimes runs a 0% financing promotion (or financing as low as 1.9%) on new models for well-qualified buyers.
But while there are benefits to buying a brand new car, it might not be the smartest financial choice. At the end of the day, you have to decide whether to buy brand new or used. However, before you think a car with only 10 miles is the better deal, here are three arguments for never buying a brand new car. (See also: 10 New Car Costs the Dealer Is Hiding From You)
1. The Obvious Reason — You'll Pay More
If money is the least of your worries, it probably doesn't matter whether you buy new or used. But if you identify with the rest of us and you're pinching your pennies, you need a monthly payment that doesn't stretch your budget or cause unnecessary financial strain.
The good news is that buying a car doesn't have to complicate your financial life. If you have good credit and you're able to qualify for a new car loan with no hassles, banks may compete for your business and offer the best rate possible.
But even with low-rate auto financing on a new purchase, a new car will be more expensive than an older version of the same car. Not only because of the higher sale price — you'll also pay more in other areas. Brand new cars can have higher insurance premiums than used cars. And if you live in a state with personal property taxes, the newer your car, the more you'll pay in taxes each year.
2. Faster Depreciation and Negative Equity
It's not fair or right, but new cars depreciate faster than used vehicles. The sad reality is that the average new car can depreciate as much as 19% in its first year — and that's just an average. What does this mean for you? To put it simply, if you buy a brand new car without a down payment, or if your monthly loan payment isn't high enough to compensate for depreciation, you could end up owing more than the vehicle is worth.
Let's say you pay $20,000 for a brand new car and $3,000 in finance charges over the length of a five-year term. This brings the total cost of your car to $23,000. We'll factor in a 19% rate of depreciation for the first year, which brings the value of the car down to $16,200. Your payments are $350 a month, or $4,200 a year, so by the end of year one, you'll owe the bank $18,800. Sure, you're making progress on the loan. But since the value of your car dropped nearly $4,000, you now have negative equity and you owe $2,600 more than the car is worth.
Negative equity isn't the worst thing to happen if you plan on keeping the car until it's paid off. But if you're the type of person who trades in vehicles every two or three years, negative equity can increase the cost of your next vehicle. If the dealership gives you $19,000 for your trade-in, yet you owe $22,000, the $3,000 difference doesn't disappear. Instead, the dealer tacks the negative equity onto your next car loan. So instead of a sale price of $27,000 for your next vehicle, you end up financing $30,000.
On the other hand, if you skip the brand new car and buy a vehicle that's one or two years old, you'll be able to get the car at a price that's more comparable to its actual value, and possibly avoid an upside-down loan.
3. You Get More for the Money Buying Used
Since cars depreciate rapidly within the first year, buying used is an opportunity to get more for less. I have a friend who purchased a one-year old Toyota Camry XLE back in 2010. It was a top-of-the-line Camry with wood grain, leather seats, sunroof, rims, heated seats, JBL sound system, dual temperature control, fully loaded. Just one year prior, the car sold for about $28,000 brand new. However, she was able to purchase the vehicle for a little more than $20,000. The car only had 13,000 miles and not a single scratch or stain. It was like buying a brand new car, without the brand new price tag.
This article first appeared at Wise Bread.