When it comes time to get a new set of wheels, those of us that use our cars for our daily commute to work, for running daily errands around town, and for shuttling the kids back and forth, we often have strong opinions of exactly what we want when car shopping. Top-line safety features, all-wheel drive, leather interior, back-up cameras, built-in navigation… wait, how much will that cost? Nevermind, I can use my phone for navigation and fabric seats don’t get nearly as hot in the summer. Car manufacturers are some of the best companies you will ever see in terms of the upsell – in fact, they got so good at it that many luxuries just became standard features.
The result of this is that the price of cars, trucks, and SUVs has climbed dramatically through time forcing many people to put themselves in financial jeopardy so that they can purchase something that meets their needs and makes them happy. The latter shouldn’t be overlooked when car chopping given the amount of time most Americans spend in their car. You need to be able to balance price, utility, style, and luxury. You also need to look at your finance options, decide on buying vs. leasing, what insurance to carry, and whether to go new or used. In this article we’ll review those options and give you the pros and cons of each.
Buying vs. Leasing
I have often heard people say that leasing is simply throwing away money. That you are paying for nothing, aren’t going to end up with anything to show for all those payments at the end of the day and will be paying for a car continuously. That is partially true, but it’s not so clear cut when you start to look at the details.
Let’s break down this argument and supplement it with some special cases. First, are you really paying for nothing? No. You are paying to use a new car on a daily basis, for a fixed period of time (typically 2-3 years). You also typically get this access to the car for a payment that is significantly less than what a car payment would be to purchase… often this amount equals out to about what you might pay in interest on a car loan should you purchase. It is true that you don’t own the car at the end of the day, and in many cases don’t even have the right to purchase it at a (good/reasonable) price, but it is often the case now that people have car loans that stretch out over 7-10 years, so really you probably don’t have anything, especially if you’ve bought new, after 2-3 years on a purchase.
However, if you shop smartly, get a low to no interest loan, and buy used there is a good chance that you will come out better, even on a 2-3 year timeline on buying. And if you buy cash then you also have the option to save on insurance as well as you’ll be able to craft your policy to your needs. Also, if you drive more than 10-12,000 miles per year you really need to start looking at mileage fees. For someone who drives 30-40,000 miles per year a lease just will never make sense. Also, if you are the type of person who drives a car for 10+ years then you really start to save money in the long run on buying.
The real benefit of a lease is that usually you are driving a new car essentially all the time. If this is important to you for whatever reason, then leasing may be the way to go. Many small business owners that I know drive clients around quite a bit, and as such they want to drive in style. If the lease is for business, then this often means they can write it off as an expense, lowering the price substantially.
The Verdict: If you buy used, and keep our vehicles for a long time, or if you drive more than 12,000 miles per year then buying is the better option for you. However, if you constantly want to drive something new, are using the car for your own business, and can watch your mileage, then leasing is worth considering.
New vs. Used
The decision on this one is quite clear – buying (the right) used car is the better decision. However, notice that I specify that you need to buy the right used car… if you buy the wrong one, you can be in serious trouble.
Why go used? Simple, it’s the price. Most cars lose value at a hyperbolic rate – meaning that they lose value very quickly at first with the value-loss slowing with time. For example, your car may lose 20-30% of it’s value in the first year and around 50% of the total value after 3 years, but this will then slow to a smaller decline every year. This is why if you can find a car that is 2-3 years old that has low mileage and has been take care of you have the potential to get a great deal in a used car.
However, let’s look at the benefits each way:
Buying New: You know the car is in perfect working order, it is fully covered by the manufacturer’s warranty, many dealerships include maintenance for 1-3 years (including oil changes, tire rotations, etc), and you can often get special financing at near zero interest rates. However, this is paired with a significantly higher monthly payment.
Buying Used: You need to understand exactly what parts of the warranty transfer over and what doesn’t (for example, the 10 year, 100,000 mile warranty on the engine/drive train that some auto-makers advertise only applies to the original owner while the 3 year, 36,000 mile warranty applies on owner changes). Buying certified pre-owned can help with this. If you’re buying from an individual you need to do a lot of research to make sure it is the right used car for you. The major benefit of buying used is that you can save a load of money if you do it right.
The Verdict: Buy a used vehicle from a certified dealer – it may cost you more upfront than buying from an individual, but they are heavily regulated and, in most cases, really value customer service and satisfaction, meaning that you will have more peace of mind in the long-run. They can also usually arrange financing (if you want). New cars simply lose too much value in those first few years.
If you have a loan (or lease) then this is basically decided for you. You will need to have full coverage, meaning liability, comprehensive, and collision coverage. The real question is what deductibles you’ll want – higher deductibles can save you a lot of money. For great deals, check out the insurance link at the top of our page (coming February 2019). I always recommend talking to a professional to get a good understanding of the level of liability coverage you may need. Quotes and calls are always free, so call up your local agent and get advice and quotes – and then use our online comparison tool to see if you can get the same coverage for cheaper.
If you don’t have a loan then you need to decide what coverage you want and need. Liability is required by law in every state, so that one just becomes a question of coverage levels. Comprehensive and collision cover you for Acts of God and accidents when you are at fault, respectively. This depends a lot on how much you drive, how accident prone you are, where you live, and the value of your vehicle. Let’s look at each of these:
- If you live somewhere with hurricanes, tornadoes, fires, or flooding then you should very well consider comprehensive, especially if you park outside or on the street. Comprehensive covers you if a tree blows over on your car or you get flooded out. I like to put a high deductible on this, say $1000, to lower my monthly payment, but still ensure that I’m covered. I choose that level because for me it balances the monthly cost with how much I don’t mind paying out of pocket with the vehicle price.
- Some people just aren’t good drivers, especially in certain situations. My wife, for example, drives very well, but she does not do well when parking… more than once we’ve had to replace a quarter-panel because she hit a concrete bollard or a bumper after backing into a post. Also, I’ve had some bad luck in parking lots. My car got damaged three times while parked in a parking lot in a year, and only once did someone leave a note. These repairs were covered by our collision insurance.
- Your vehicle’s value should be a major driver on your choice for coverage. I had a 7 year old Kia hatchback that was worth maybe $3000. On this car I only carried liability. Why? Because it was a throwaway vehicle. If something happened to it, I wouldn’t have bothered getting it repaired. Full coverage would have been $150/month with a $500 deductible and liability alone was only $35/month. So, $3000 (value) – $500 (deductible) = $2500 in payout for being totaled (at most). This means if it wasn’t totaled and wasn’t my fault in less than 18 months I’d be overpaying. So, I opted for just liability on that vehicle.
The Verdict: Tailor your insurance needs to your circumstances. Don’t hesitate to do it on a vehicle-by-vehicle basis either, with more coverage on your nicer vehicle than on an older one.
Loans and Finance
Car loans are an interesting beast and they run the spectrum. This is the one area where buying new can really beat buying used. A lot of times, especially in the off-peak times of year, or if sales are lagging behind you can get 0% or very low-interest loans for the first 12-36 months. This can be a powerful incentive, especially when compared to the extortionate rates some used car sellers offer. I have seen advertised rates of 7.9-13.9% APR on used cars… and I know people who have been duped into taking this.
On used car loans, always check with your bank to see if they have offers – if you have found the right bank for you, you can often get excellent rates as a customer. Always make sure to check!
Loans rates are typically based on a combination of the vehicle you are buying, dealer/auto-maker incentives, your credit, and if the vehicle is new or used. However, if you do find yourself in the odd position of needing a loan and the difference is teaser rate on a new car and the used car loan rate is substantial, look at a loan calculator such as this one by BankRate to find out how much more interest you’ll pay on one loan than another.
Choosing the right car is an important decision. The most important thing is to make sure that the car meets your needs. If you buy something that is ill-suited to your needs it doesn’t matter how good the price was – you’ve made a bad purchase. However, once you’ve chosen the right model and make for you can then decide on buying vs. leasing and new vs. used, with a strong preference for buying and especially for buying used when certified by a reputable dealer.
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