Why You Shouldn’t Be So Quick to Judge New Cars as a Bad Deal

“It’s always better to buy a car that’s 1 or 2 years old versus brand new. The brand new car has taken the huge depreciation hit and you can buy the same car for that much cheaper”.

That makes perfect sense; cars take a huge hit in value as soon as you drive it off the lot. It’s always been like that, and cars sure as hell don’t go up in value as soon as you buy them (rare exceptions do occur (link to BMW M135i). So why would you ever buy new?

But consider the total package including warranties, trade in, rebates and interest rates.

Now things aren’t so clear and dry.

There’s a lot that goes in the new car buying experience that people miss out because they shut it out completely.

And these deals are usually found in “new cars” that are last year’s model during model year end clearance sales. It’s not a sham when you hear it on the radio; most dealerships need to get rid of inventory so they can make space for the next year’s model.

The reason 1–2 year old models cost more than they should is because everyone is trying to buy these cars because they think it’ll save them money. It theoretically should but because everyone is doing it; demand goes up and supply stays steady, therefore pushing the price up. Now the deal isn’t as good as we thought it would be.

Let’s break down the reasons why:

Trade in

Depending on your local tax laws, during the trade in process you can save a lot of money on taxes. When trading in for a new car, you will be charged for taxes on the value of the new car minus the value of the trade-in. So you’re only paying taxes for what you owe on the car, not the negotiated price of the car.

When it comes to used cars however, unless you buy from a private seller you are paying taxes on the negotiated price of the car.

Interest Rates

Generally, and especially during clearance sales, interest rates are cheaper on new cars and can potentially save you a considerable amount of money over the lifetime of the loan (depending on the purchase price).

For example buying a used car for $35,000 @ 6.59% will cost you $4,910 over a 4 year loan for a total of $39,410.

Instead if you bought a brand new car for $40,000 @ 1.8% interest, the loan would cost you $1600 for a total of $41,600.

Warranties

Warranties on a car started on the day it is bought by the customer. So that means if you buy a car that’s a year or two old, but it’s “brand new”, the warranty starts right there. But if you buy a used car that is 1–2 years old, the warranty now only has 2 years left. The 2 extra years of warranty and the peace of mind is usually worth the extra cost.

Rebates

New cars can sometimes have massive rebates that are offered by the manufacturer and make the purchase of the car that much more attractive. With a little research online, you can find details of these rebates in your area.

Example

Let’s take a look at a real world example that was found this year:

Used car: 2012 Dodge Ram 1500 with 9800 km on the odometer for $37,000 @ 6.25% with only 1 year left of warranty.

New car: 2013 Dodge Ram 1500 for $38,000 @ 3.43% after rebates.

Now if you include 2 years of warranty, better features, higher resale value and the fact that cost of financing was cheaper, it’s clear what the better deal is.

When comparing the costs of buying a new car versus an older car it, helps to look at the whole picture when deciding between buying new and slightly used.

In general, this is the order of car prices:

New undiscounted price > 1–2 year used model > New discounted car

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