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Dear Liz: My husband and I own a car that’s on its last legs, and we are contemplating a replacement.

Normally we buy used, but the kind of car we want is not readily available as a gently used vehicle because people tend to keep this type of car for a long time. Also, the resale values tend to be high, so if we do find one that’s just a few years old, it’s likely to cost more than what we’ve saved so far.

Might it be a better idea for us to buy a new version with dealer incentives, such as low-rate financing, rather than continue searching for a used version to buy with cash?

Answer: You’ll save a lot of money over your lifetime if you use cash to buy cars that are a few years old and then drive them for at least 10 years.

Buying used avoids the steep depreciation that erodes new-car values as soon as you drive the vehicle off the dealer’s lot. Not replacing cars frequently also saves you money and gives you time to build up cash for the next purchase.

The problem with financing cars is that it can encourage you to buy more vehicle than you can really afford. Before you let dealer incentives sway you, check out car comparison site Edmunds.com’s “True Cost to Own” feature. This handy guide shows you all the costs of owning a vehicle, including insurance, maintenance and repairs. In many cases, the true cost of owning a car is double, or more, the monthly payment.

That’s not to say you can never buy new or never finance a car. But you should make sure it really fits your budget, and put strict limits on your spending (because lenders certainly won’t).

If you’re going to finance a car, put at least 20% down — more if possible. Limit the loan to no more than four years, and make sure the payment doesn’t exceed 10% of your gross income. A 5% limit is better for those with considerable mortgage payments or other debt.

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Categories : Credit & Debt, Q&A

3 Comments

1

Thanks for this. As rational as I am, I still love new vehicles and constantly read car blogs and watch car shows in my past time.

The rational side of me thinks of cars as a value stock that will lose money. If I want to lose the least amount of money, I will do one of two things:

1. Buy a new car that is “over valued” and will lose the least amount of resell value during the period I plan to hold it.
2. Buy a used car that is “under valued” and has lost more value that its peers in the same time frame, reducing the hit when value bottoms out.

There are other things to consider too like if the manufacturer is about release a newer version of your new car or reliability of your used car. Thanks for these tips and pointing to Edmunds too.

2

I’ve bought new cars, too, and it definitely has its advantages–particularly having control over the break-in period, which can make a difference in the life of the engine and transmission (so I’ve heard–clearly, I’m not a car buff!). But a new car is definitely a luxury, so I believe you should pay cash or at the very least put down 20% and use a 3-4 year loan to pay it off quickly.

3

I’ve personally bought 15 cars off of eBay Motors. 2 I still have, 2 I lost money on when I sold them and 11 of them I turned a profit even after driving them from 1 month to 18 months. Highly recommend buying used cars off of there.

Edward James Parker
Watch Historian