Q&A: Should I Buy a New or Used Car?
By: Brian O'Connell

Q: I’m ready to give our old Hyundai to my college-aged daughter, which means I’m in the market for a new car. With money tight, can I get away with a used car? Or should I pay up for a newer, presumably better set of wheels? — T. Shahood, Nashua, N.H.

A: It really depends. The new car likely has a better warranty, fewer problems, and should prove a more durable option years down the road.

Then again, Cars.com reports that a new car loses 40% of its value within three years. So the resale value of a new car isn’t that strong.

Let’s play the “pros vs. cons” game and see what options might be best for you. A quick note: we’re only going to focus on the financial end of the car purchase. If you do opt for a used car, take it to a trusted mechanic for a thorough check-up beforehand.

Price. Used cars cost much less than newer models. According to the Comerica Auto Affordability Index, a new car today averages about $27,958 — that’s up 6% from 2009. But Cars.com says the average price for a used car is only $8,244. Advantage — it’s close, and you want to buy quality, but paying around $8,000 versus $28,000 gives used cars the nod here.

Price depreciation. The original owner of a new car absorbs most of the price drop in terms of a car’s value. By the fourth year of an auto’s life, the depreciation slows down. Advantage = Used car.

Financing. Banks have been loath to lend to individuals for a few years now. But one area where it’s actually possible to get a good loan deal is in the new car market. That’s because car makers have been particularly aggressive about making sure their customers have a path to new car financing. Of course, you can finance a used car almost as easily. Right now, sbup’s Weekly Auto Rate Tracker puts the average four-year new car loan rate at 5.694%. sbup’s average rate on a four-year used car loan is a slightly higher 6.319%. Advantage: New car — it’s a lower rate and, after all, you’re unlikely to find a promotional 0% rate on a used car.

Cash incentives. Again, car makers are eager to record a sale, so they’re likely to sweeten the pot with cash-back deals and other incentives encouraging you to sign on the bottom line. For example, a new BMW 335i sedan can come with $1,500 in cash incentives and $3,000 in dealer cash. That cuts the purchase price — normally about $42,000 — to $37,500. But even a two-year-old 335i sedan will likely cost you $35,000. Advantage: New car — cash incentives, when offered, really narrow the gap between the price of a new car and the price of a used car.

Maintenance costs. A brand new car won’t need as much time in the shop as a used car might. Besides regular oil changes and tune-ups, your car shouldn’t need much work until 30,000 miles or so. But used cars are a crapshoot — and much more likely to send you reaching into your pocketbook to pay for new tires or a battery. Advantage: New car. You can’t put a price on peace of mind, and knowing your new car will likely perform reliably without needing unexpected repairs is a big benefit.

Another key difference is the warranty — most new cars offer warranties of at least three or four years — and sometimes a lot longer. In many cases, when buying a used car you may not be able to transfer the warranty from the seller to you.

In the end, you’ll have a broader choice of vehicles on the used car market, and will likely pay less. But with a new car, you’re going to get (and pay for) some peace of mind — and, of course, that new car smell.

Come to think of it, your best option may be a compromise between the two. Many car companies — Lexus (Stock Quote: TM) comes to mind — offer good pre-owned auto deals. They can give you the illusion of new car ownership, but at a used car price.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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