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New or Used, What Should I Buy?

Published in the Serious Buyer, Serious Seller Eletter, August 15, 2011, Written by Viraf Baliwalla

A car is the second biggest purchase one makes, next to their home. Whether you are spending thousands of dollars, or tens of thousands of dollars, people often second guess themselves because nobody wants to make a mistake when this much money is on the line. As an agent for the buyer, we are often considered advisors, providing guidance and reassurance that clients are making the right decisions. But everyone's needs are different. And needs are very different than wants.

One of the questions we are often asked is "Am I better off buying new or should I buy used?" There is no simple answer as there are many factors to take into consideration. Some of the factors are very practical while others are purely emotional.

A lot depends on how you perceive a used vehicle. Some perceive a used vehicle, even a slightly used vehicle, as one that lacks warranty, was driven in a rough way and has scratches, dings, dents and general wear and tear that comes with the used territory. As a result, they perceive buying a used vehicle as inheriting someone else's problems with a high probability of mechanical breakdown and expensive repairs. However, nothing can be farther from the truth, especially when a vehicle is less than a few years old.

Interestingly enough, when we look at our own client list, our experience has been that one's gender may also play a big part in the decision. A higher percentage of our female clients tend to go with a new vehicle, while a higher percentage of our male clients are quite comfortable with used vehicles.

A lot also depends on how you intend to pay for it. Nowadays, most people budget according to their monthly cash flow. Most people don't have tens of thousands of dollars in cash to pay for the vehicle outright. This means you will be financing or leasing. While a bank loan is possible, manufacturers typically offer much lower finance and lease rates that will reduce your monthly payments dramatically. And, if your credit isn't stellar, manufacturer's guidelines aren't as strict so you will have a better chance at being approved than through the bank. The manufacturers aren't interested in leasing used cars but there are third party leasing companies if you need to go that route.

If you are looking for specific features or colours, you may find that such a vehicle just doesn't exist in the used car marketplace. In this case, your chances of getting exactly what you want will be far better with new. And, if you're willing to wait 6-8 weeks, you can have it custom ordered from the factory just the way you want it.

We find some people like to switch cars much more frequently and are not concerned about having ongoing monthly payments. This is an ideal situation for leasing.

So in summary, you should choose a new car if:

  • You need to finance or lease and although you can get a bank loan for a used car, the rate difference may get you a new car for the same or lower monthly payment
  • You want specific features that are not available in the used car marketplace
  • If you are very concerned that by buying a used vehicle, you may be inheriting other people's problems
  • You want to switch vehicles frequently and don't mind maintaining an ongoing monthly payment.
For all other situations, we recommend buying a used vehicle. The cost of a used vehicle is always lower than that of a new one. Depreciation takes a huge toll as soon as you drive off the lot and is highest during the first year. A vehicle will lose anywhere from 20-30% of its value in that first year even if there isn't a lot of mileage driven. If you purchase a vehicle that is slightly used, you can let someone else take that initial hit for depreciation. You'll still have most of the warranty available and if you are really concerned, you can inexpensively add a comprehensive extended warranty that kicks in when the manufacturer warranty expires.

As I said before, mindset plays a big role in the decision. I personally like the idea of having a new car, being the first name on the ownership, having a full warranty and, of course, that new car smell. However personally, when I do the math, my "wants" ends up taking second place to making a sound financial decision. I am not so concerned about losing a bit of warranty since I can always add on when the time comes. Till then, the basic warranty is still in place if something bad happens. And if I really want that new car smell, it's amazing what a good detailing shop can do.

 

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