Smart Spending

Should You Buy A New or Used Car?

When buying a car, the biggest decision you have to make is whether to buy a new car or a used car. Figuring out which works best for you requires considering your goals, lifestyle, and what you can afford.

Here are some things to consider as you shop for a car:

Financing Cost

When you buy a car with financing, one of the most important things to consider is the interest charge. A used car normally comes with a higher interest rate than a new car.

If you buy a used car for $12,000 with a 3.5% interest rate, your total cost on a 60-month loan might be $13,098. On the other hand, you might be able to get a 1.9% interest rate on a new loan, for a total cost of $18,883. With the new car loan, you are paying $883 in interest, while you pay $1,098 in interest with the used car — even though the new car is more expensive.

Many dealers have relationships with lenders, or might even have wholly owned lenders. There’s a focus on selling new cars, so an incentive like a lower interest rate can make sense.

If you want to get a better deal on financing, a new car is usually the way to go.

Insurance Cost

It seems clear that buying a new car results in higher insurance rates. After all, a new car is usually more expensive and the replacement cost is higher. That means higher premiums. Plus, if you finance your car purchase, the lender is likely to require you to purchase comprehensive coverage, instead of just settling for collision coverage. If you can afford to buy a used car without financing, you might not need to pay for higher coverage, and that means savings over time.

On the other hand, there are some times when a used car can cost more when it comes to insurance coverage. Depending on whether you finance the car, how old it is, and a lack of safety features, you might be surprised to discover that a used car can come with higher premiums. Compare costs, or talk to a knowledgeable insurance agent about the realities of insurance before making your choice.


The elephant in the room when it comes to buying a car is depreciation. When you buy a new car, it can lose as much as 20% of its value in the first year of ownership, depending on the make and model. While a used car depreciates over time, the biggest decline in value takes place during the first four years. If you finance your new car, it’s not uncommon to find yourself upside down on the loan during the first couple of years if you don’t have a big down payment. With a used car, even if you finance, there is a good chance that you won’t be upside down for long (if at all).

Cash Flow

A lot of the time, when deciding to buy a new or used car, you need to consider your cash flow needs. A less expensive car means lower payments when you finance. Financing a used car often means a lower payment, which means better cash flow, making your monthly payments more manageable. However, a less expensive new car with better incentives can still be a good deal. An $12,000 used car with a 3.5% interest rate on a 60-month loan has a $218 monthly payment. A $15,000 new car with a 1.9% rate only costs $262 per month. The cash flow is similar, but you end up with a new car instead of a used car.

Repairs and Reliability

Finally, don’t forget to consider the realities of repairs and reliability between new and used cards. A used car might cost a lot less, but it might also be unreliable. You might find yourself spending more in maintenance and repairs. At the same time, you might suffer in terms of peace of mind. In some cases, even if the used car is newer and should have a warranty still available, it might be voided if the car doesn’t change hands in a certain way.

New cars generally have fewer mechanical problems and most of them have warranties. Depending on incentives, you might even get a set number of free oil changes. Check into the incentives if you are interested in a reliable car.

Should You Choose New or Used?

In general, a used car is probably going to cost you less over all. You might even be able to buy it outright, without financing, if it’s very inexpensive. However, new cars come with their own advantages, including reliability, better deals and incentives and peace of mind. Carefully consider what matters to you in terms of lifestyle, and the purpose of the car. If you know you need a reliable vehicle for long-term commute, buying a cheap car might not be the best option.

When financing a used car, though, the advantages might not be as clear, especially if you can find a less-expensive new car and dealer incentives to make the car more affordable for your situation.

About the author

Miranda Marquit

Miranda is a freelance journalist specializing in topics related to personal finance, investing, entrepreneurship, and small business. Since receiving her M.A. in Journalism from Syracuse University, her work has appeared on a number of web sites including Wise Bread, U.S. News & World Report, Forbes, AllBusiness, and Huffington Post. She writes for the Equifax blog and the Quizzle blog, and has written extensively about credit, retirement, insurance, and taxes for a number of other corporate blogs and web sites. Follow Miranda on Twitter, @MMarquit, and check out her personal finance blog, Planting Money Seeds.

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