The smart financial decision is to purchase a 3 to 10 years old car from a reputable car brand with no historical problems and low mileage. This way, you would be buying a car that is much cheaper than it would have been brand new without the worry of high repair and operational costs of an older car. While this is the most financially optimal way to approach buying a car, your final decision ultimately depends on your lifestyle.
Should You Consider the Purchase of a Used Car?
Before you go car shopping, it’s advisable to take some important factors into consideration such as whether you’ll be able to repair any problems that pop up yourself, the costs of the car compared to a new version, and your own personal feelings about the car.
Making a Decision Based on Comfort and Time Availability
For an individual who’s super busy and not a car-guru, leasing a new car might be a great option. You’ll be covered by an extensive warranty and cars tend to have much fewer problems in the first 5 years than after. To lease a decent car, however, prepare to pay at least a couple hundred dollars per month. Lease payments typically depend on several factors such as the price of the car, length of the lease, your mileage allowance, the car’s residual value at the end of your lease, financing charges (including the interest), taxes and other fees such as acquisition fees.
Leasing a car, however, means you don’t own the car. No customizations or modifications to the vehicle are allowed as you’ll only be in its possession for a while after which you’d return the car to the dealer. The exception would be if you choose to purchase the car.
You can get similar benefits, however, even with a used car from a good car brand (e.g. Toyota or Honda). You can know if a specific car is a good choice by giving it a test drive, getting an inspection by a trusted mechanic, as well as reading reviews and possible known problems by other drivers. If all of these come out positive, chances are the car is a good choice.
Nonetheless, you cannot be 100% certain that you’ve made a good purchase. This is one of the things you’ll need to be able to live with when purchasing an old car. Sometimes it is harder to finance an old car vs a new car, but you can always think of other ways to finance it such as a HELOC.
The Money Factor
If you have the mindset that every dollar you spend should be an investment, buying a new car can be disappointing. For most cars, their value drops by 20-25% within the first 12 months of driving it, with a large proportion coming off right after you drive off the lot. Its value will continue to drop at an annual rate of 10% over the next 5 to 10 years. New cars are just rapidly depreciating assets.
If you choose to buy a used car, however, the depreciation won’t be as much – the used car still depreciates at 10% of the original price per annum, but most of the depreciation would have already happened and saved you money. At least, you would have avoided the heavy depreciation of the first year of a car’s life.
What Do You Personally Want?
Don’t let anyone tell you your feelings should be shoved aside when it comes to purchasing a car. Sometimes, the most practical decision as perceived by others might not give you satisfaction, and that too is valid! Don’t be so fixated on the money factor that you refuse to consider your actual feelings about buying a car.
Have you always been passionate about owning a new car? Go for it! However, if you’re a more practical person who is trying to be financially savvy, a good used car of about 5-years a mileage of less than 100,000km (or 60,000 miles), preferably of a solid brand like Toyota or Honda, should be high on your consideration list. Be sure to have a trustworthy mechanic check it out before you buy it though!
Being realistic about your financial state is a smart way to filter out potential financial regrets such as buying a new car that will lose a third of its value within two years. While the purchase of a decent used car is would most likely save you money in the long run, the decision is ultimately yours. If you really like a car and can afford it, go for it!