Lynchburg Living

Currently in Currency

By Susan S. Davidson, CPA

If an individual informed you of an investment opportunity that would turn a $25,000 investment into $15,000 in just three years, would you take him up on that offer? Without a doubt, you would not have to spend much time thinking about that deal. So, why would investing your money in a vehicle be any different?

According to Consumer Reports, on average, new automobiles depreciate by as much as 65 percent during the first five years of ownership, with the majority of depreciation occurring during the first three years. In light of this startling statistic, why are so many Americans willing to make this financial sacrifice? Hal Hinkle of the Hinkle Charitable Foundation maintains that “Many Americans have an emotional … attachment to the kind of vehicle they drive. For some, it is a sense of self-reflecting style, for some it is status, for others it is [a sense] of protection in a collision.”

Some new-car buyers argue that there is a “value” associated with the pleasure of driving a brand-new car which outweighs the financial sacrifice. For yet others, the fear of winding up with a “money pit” deters them from even considering buying a used car. So, what is the best choice?

While there are certainly advantages and disadvantages associated with both new and used cars, it is ultimately a personal decision. If you are currently experiencing the “new versus used” dilemma, consider the following lists of pros and cons to assist you in the process:

NEW CAR PROS

-Low Repair Costs

Since most new cars come with a manufacturer’s warranty that is valid for three years or for a certain mileage, the manufacturer or dealer is responsible for most repairs during that time frame.

-Customization

The ability to get exactly what you want is one of the biggest advantages to buying a new car. Interior and exterior colors, engine size, internal GPS, custom seating, stereo system … the choices are endless!

-Peace of mind

Possessing the latest in crash-test safety technology, new cars offer consumers the peace of mind that their loved ones will have the best possible protection in the event of a collision.

NEW CAR CONS

-Depreciation

A new car will lose 40 percent of its value in the first three years and as much as 65 percent after five years.

-Insurance Premiums

Since new cars are more valuable and more likely to be stolen, the cost to insure them is typically greater than the cost of insuring an older used car.

-Financing Costs

Interest rates are tied directly to the cost of a vehicle, so you will pay more to finance a new car versus a used one. Some new cars, however, come with special low-introductory rates which will save you a significant amount in interest costs. The base prices, however, are still much higher than their used counterparts.

USED CAR PROS

-Purchase Price

No one will argue with the fact that most used cars are cheaper than new ones. For instance, the MSRP on a new 2011 Toyota Camry SE (4 cyl.) is $22,590. Used car Web site Edmunds.com lists the value of the comparable 2008 model at approximately $13,800.

-Depreciation

By purchasing a vehicle that is at least three years old, the buyer avoids the sharp decline in value associated with the car’s first few years of life. In the example above, the car declined in value by 39 percent during the first three years.

-Financing Costs

Even if you do not have the cash to buy a used car outright, the interest cost of financing a used car will typically be cheaper than financing a new one. Keep in mind that interest rates are linked to the age of the vehicle–the younger the car, the lower interest rate.

USED CAR CONS

-Repairs

If a used car is currently not under a manufacturer’s warranty, the owner will bear the financial burden of repairs. Most people do not have sufficient cash on hand to pay for expensive repairs and must resort to using high-interest credit cards when they fall short.

Keep in mind, however, a new car loan of $20,000 at a 6.99 percent interest rate will cost $4,740 a year. Unless the “expensive” repairs on your used car exceed the cost of paying for a new one, you will be better off putting your money into repairing your old car rather than financially strapping yourself to a new one.

-History

Previous accidents, flood damage and recurring mechanical issues are just a few of the “unknowns” of buying a used car. Many dealerships now offer “Certified Pre-Owned” vehicles which have been thoroughly inspected and may even offer extended warranties.

Whether you decide to buy new or used, keep in mind that a vehicle is merely a means to get you from point A to point B. American financial author and motivational speaker, Dave Ramsey, once said, “When you are working, playing with your children or helping a friend, you are not thinking to yourself, ‘Man, I am so happy since I have a new car. Life is beautiful!’ The key to happiness is not a new car, so don’t pay for it like it is!” Well said!