Comparing the cost of new and used cars

Once you have an idea of the kind of car you
want and roughly how much you're looking to spend, the next question might be: new or
used? A used car will often cost less than a new
one. But a new car may be more reliable and have fewer unexpected repairs that can impact
your schedule and budget. For this example, let's take a look at two
cars- one new, and one used, and then compare and contrast all the variable expenses you
might encounter with each car over the next five years - like, the cost of the car, the
cost to finance it, the cost of gas, insurance, and finally maintenance and repairs. But first, lets start with the cost of
the actual car.

So over here, lets say we have a brand
new car with a sticker price of nineteen thousand dollars and over here, we have a used car that is
the same make and model as the other one, just five years older that we found for sale
by its owner for ten thousand dollars. Now you may be wondering why is the used car
so much cheaper than the new car? There are a couple of factors- one is that the new car
comes with a warranty which will cover some of your repair expenses, but the biggest factor in the price difference
is depreciation. As a car gets older, it loses value, that
is, it depreciates. So this new car that cost nineteen thousand
dollars, after five years might only be worth about ten thousand dollars even if youve
kept it in good condition.

And the same car might only be worth about
five thousand dollars in another five years. As you can see, depreciation doesnt happen
at a constant rate. Sure, its almost always going to go down,
but a new car loses value fastest the moment you buy it, but then slows to a more constant
rate after the first few years. If you plan on driving your car until it falls
apart, depreciation wont matter as much because youre not going to resell it.

But
if you plan on trading it in or selling it after five years, it can make a big difference.
With a new car, in five years, your car might be worth about nine thousand dollars less
than what you initially paid. And with the used car, over five years, your car might
only be worth five thousand dollars less. Now lets take a closer look at some other
differences, starting with the financing. You may be wondering if you can finance a
car you buy from an individual? Fortunately, you can get this kind of financing from a
bank or a credit union.

But when you purchase a used car, youll
likely get a higher interest rate than when you buy a new car. So, lets say the annual percentage rate,
or APR on a five-year loan for the new car is three point five percent. And the APR on
a loan that you get for the used car could be something like four percent. Using an online loan calculator, youll
find that on the new car, youll be paying about twenty thousand seven hundred dollars
over five yearsthats nineteen thousand dollars in principal and one thousand seven
hundred dollars in interest, with monthly payments of about three hundred fourty five
dollars.

On the used car, you will pay about eleven
thousand fifty dollars over five years: ten thousand dollars in principal and one thousand
fifty dollars in interest with monthly payments of about one hundred eighty five dollars. So even though you have a higher interest
rate on the used car, youll pay much less in interest and in monthly payments because
your principal is much less on the used car than on your new car. Next lets compare gas mileage. Lets
say the new car gets thirty three miles per gallon and the used car gets twenty nine miles
per gallon and you drive about fifteen thousand miles per year.

Lets also assume that gas
will be a constant four dollars per gallon. [Take this next section very slow] Over five years taking the miles driven
divided by the miles per gallon times the price of gas per gallon we would be spending
about... [Resume normal speed] nine thousand one hundred dollars for gas
for the new car and about ten thousand three hundred fifty dollars for gas in the used
one. Then there are insurance rates to consider.
Insurance rates vary based on a lot of different factors, and in looking at new versus used,
the difference in the rate for you will likely be based mostly on the replacement cost of
the car.

The more valuable the car, the higher the insurance rate. So while a new car might
get you some discounts for new safety features, generally a used car thats less valuable
is going to cost less to insure. So with a new car, your insurance might cost
one thousand five hundred sixty dollars a year. Over five years: seven thousand eight
hundred dollars.

And with a used car, your insurance might
cost one thousand two hundred dollars a year, and six thousand dollars over five years. Now lets look at maintenance and repairs.
This is the trickiest cost to estimate because its unpredictable and major repairs can
have a big impact on your budget. With a new car, major repairs may be covered
by a warranty in the first few years. So lets estimate that over five years you spend three
thousand dollars total on maintenance and repairs on the new car.

Now, when you buy the used car, you do have
the option of buying certified pre-owned- this will cost a bit more, but itll also
come with some sort of warranty. But for this example, lets just stick with
the car you bought from its previous owner. The cost of regular maintenance typically
increases as the car agesand so does the chance of needing a major repair. Major repairs
can be inconvenient too they take time and sometimes you might have to get a rental
car while yours is in the shop.

For the used car, you might be lucky and only
need to spend around four thousand dollars on maintenance, but a more realistic number
may be around six thousand dollars on the used car. So adding this up  youd spend a total of fourty thousand
six hundred dollars on the new car and thirty three thousand four hundred dollars on the
used car over five years. Thats a difference of about fourty thousand six hundred minus
thirty three thousand four hundred seven thousand two hundred dollars less on the used
car. Now, keep in mind, this doesnt take into
consideration the value still in the cars.

The new car probably has a few more years
left in it than the used one and if you were to resell them, youd be getting about ten
thousand dollars for the new car rather than about five thousand dollars for the used car. But were looking at a lot of variables,
after all. With certain cars and situations the new one may end up costing you less than
the used one. And there are multiple other things to take into consideration.

A new car will probably be more reliable,
with newer features and it may be safer or better for the environment. With a used car
youll have lower monthly payments, which could be good for your budget, but it may
also be less reliable and you could have larger unexpected costs when it comes to repairs. By looking at your own needs and budget, and
doing the research and the math on the cars youre interested in, you can figure out
which is the best choice for you..