Buying a New Car or a Used Car

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Summary: Should you buy a new car or a used car? There are plenty of factors that will weigh in on the decision, including what kind of financing you can buy, and which car is ultimately the better deal. Also, with the Cash for Clunkers deal, you might get a better deal if you're trading in a used car with a lot worse gas mileage for a new car with great gas mileage.

Q: I have a couple of car buying questions I hope you can answer.

First, I think radio talk show host Clark Howard has preached to wait till a car is 2 years old before buying it to avoid getting hit with all of the depreciation that takes place in the first few years. What is your opinion on this? (Please take into consideration that I would be holding on the car for at least 7 years or more.) I have owned my current car for 9 years.

Second, let's assume I'm going to buy a $25,000 car. I can afford the monthly payments, but am I better off putting $10,000 down on the car to lower my monthly payment (and cut the amount of interest I pay over the life of the loan)? Or, should I get a loan for the full amount and save that $10,000 to invest somewhere else? Does the term of the car loan count or are there any other variables I should be thinking about?

A: I think I'd buy a used car right now, since the depreciation on new cars has been extremely steep. The only kind of new car I'd think about buying would be a one-year old model that has never been driven. So, you get the depreciation, but you are also basically getting a new car.

The dealer lots are littered with new and used cars for sale. There are amazing opportunities out there right now for anyone looking to get behind a different set of wheels. Just make sure you take the warranties that are offered. The only extended warranty I'd buy is from the manufacturer of the car - and only if you believe the manufacturer will still be in business down the line.

One new factor: The Cash for Clunkers program. You may be able to get up to $4,500 if you trade in your old car with bad mileage for a new car with a lot better mileage. If you can get $4,500, it may make economic sense to buy a new car - if you can find a good enough deal.

As to your question about the financing, I never finance my cars because the interest rate you pay is always so high. Even if you get dealer financing for 4 to 7 percent, which is historically low for a car loan (excepting zero percent financing and special deals like that), you'd have to earn a return of nearly 10 percent so that after paying taxes on your profits you'd wind up even with what you're paying out on the car loan. (And, if you can find a place with a guaranteed 10 percent return on investment these days, please email me!)

So, I'd put down whatever you can afford to lower the loan you're taking out to buy the car. If you have $10,000, put that down, unless that will leave you with no emergency funds. Get your financing in place ahead of time so that you aren't at the dealers' mercy (if you have great financing, you can always see if the dealer can offer you something better). Best places for financing: Credit unions and then local banks. Try to get a financing package that has the car paid off in 3 to 5 years and doesn't penalize you for prepaying. If you're knocking $10,000 off the cost, you may be able to swing a 3 to 5-year loan instead of a 7-year loan. That should save you a thousand dollars or more on your loan.

Plan on keeping the car 7 to 10 years unless you drive 15,000+ miles every year or need a nice car for work (because you're carrying clients, for example). You will save thousands of dollars in car expenses over your lifetime.

Good luck. Hope this helps.

Read More:

Buying a Used Car

Purchasing a New Car Versus a Used Car

New Tax Deduction for Car Buyers: Cash for Clunkers