Buying a used car is less expensive upfront. For example, a 2017 Hyundai Sonata is listed at $21,950, while a 2015 model has an average fair market value of just under $14,800, according to Kelley Blue Book. By dropping just two model years, you’d save around $7,000, about a third of the suggested retail price.
Comparing the costs of buying new versus used starts with the real money-saver in buying a used car: depreciation. This is the amount of value a car loses as it ages.
New-car versus used-car depreciation
A new car depreciates quickly in its first year, by 20% to 30%, and then much less — about 10% — in the second through sixth years. If you purchase a car in the second year, you avoid the steep depreciation of the first year. So buying a car that is just a few years old can save a significant chunk of change.
For example, say you buy a new car for $30,000 and sell it in three years for $15,000, costing you $15,000 in depreciation. Or, you buy the same car, but when it’s 3 years old, for $15,000. Three years later you could sell it for $10,000. Depreciation costs you only $5,000.
Some types of cars hold their value, depreciating slowly, while others do not. Research resale values before buying, using sources such as Kelley Blue Book and Edmunds.com, and decide how important depreciation savings are. Choosing cars that depreciate slowly can save you money in the long run since you’ll get a higher resale price.
However, you pay the cost of depreciation only when you sell or trade in your car. If you intend to drive the car until the wheels fall off, depreciation isn’t an issue.
More used-car upsides
Besides the savings in the purchase price, there are other benefits to buying a used car. You’ll face lower insurance rates with an older car. This is because it would be less expensive to repair or replace a used car if it were stolen or in an accident. Annual registration fees are also less expensive for older cars.
The purchase price isn’t everything, and there are plenty of reasons to buy a newer model:
- Easier shopping: New-car shopping is easier because the condition of the vehicle isn’t an issue. If you buy used from a private party, you’ll want to pull the vehicle history report and have a trusted mechanic inspect the car — all of which requires time and money.
- Lower financing rates: Automakers offer reduced financing rates on their newer brands, which can save you thousands of dollars over the life of your auto loan. You can use a car loan calculator to estimate your monthly payments and see how much you’d pay in interest.
- Newer technology: Having a car with the latest technology doesn’t just mean fun features like heated seats and Apple CarPlay. It can also add life-saving safety features like automatic braking and blind-spot monitoring. For some drivers, these features could be well worth a higher price.
- Warranty coverage: If a new car needs repairs, you would be able to get it fixed for free under standard warranty coverage. This is generally three years or 36,000 miles for a new-vehicle limited warranty, and five years or 60,000 miles for a powertrain limited warranty.
Some buyers may have worries about reliability and extra maintenance for used cars. But cars have become more automated and self-diagnosing. The average lifespan of a car on the road is up to almost 11.5 years.
At the same time, car buyers may have also heard the phrase “never buy new” and that it’s always more expensive to buy a new car. Sometimes, however, low financing rates and warranty coverage can make the higher price worth it. And if you plan to own your car for its entire life, you don’t have to worry about depreciation, dodging the biggest cost of all.
Buying a used car usually is the better financial bet: The purchase price is lower, you avoid the biggest hit from depreciation, and you pay less for car insurance. However, other factors could still push you toward buying a new car. You may pay more upfront, but depending on the car, the price could be made up in low financing rates, warranties, new features and convenience.