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.