8

I'm looking for an answer based on quality (they don't make 'em like they used to), price (are new cars even worth the $), and/or reliability/low maintenance (where leasing is attractive) which option makes the most sense. I'm not asking what to buy, just in general what would experts on the site recommend.

For the sake of the question let's say cost doesn't matter.

  • 1
    What are your driving habits? What is your financial / job situation? How much usage does the vehicle get? What class of vehicle are you looking for? Lets narrow down the question to avoid a 3000 word answer. – MrChrister Apr 11 '13 at 17:24
12

Welcome to Personal Finance and Money.

This answer will depend a lot on what is most important to the buyer, for example, whether it is important to always be in a newer car, to save money, or strike a balance between the two. There are trade-offs and I don't think there is one right answer for all circumstances.

Leasing

Leasing does make financial sense for at least two types of people I'm aware of:

  1. The company I work for provides company cars to sales executives, which we lease. We lease because it wouldn't be appropriate for a salesperson to meet a client in a car that clearly appears used.

  2. Similarly, I know people who value being in a newer car all the time, and for them, leasing makes more financial sense then buying a new car every 2-3 years, and selling their old car which is now 2-3 years old and has depreciated significantly. They understand that they are paying more to always be able to be in a newer car. I used to work with a manager who, every time the new model of the car he owned came out, would see the car and buy it on the spot, even though he already owned last year's model, and he didn't need two cars. He just couldn't help himself; he felt he had to have the new model. It's no use sermonizing about how he "should" learn to save money by just being content with what he had. In reality, if he is going to buy the new model every year no matter what, he should lease rather than buy.

From my experience, I would only recommend leasing if you would otherwise be buying a new car on a regular basis, and the lease would be less expensive. This is probably the most cost effective way to maintain the highest possible quality, but would cost much more than buying and holding a new car or buying a value used car. I don't see reliability as much of a factor here since the seller will have a very good idea of how much maintenance will cost, but you will pay a premium to be able to pay a fixed cost for maintenance instead of risking a worse-than-average experience.

Buying New

According to Edmunds and BIGResearch, only a relatively small number of people are ever in the market for a new car at a given point in time. While you do pay quite a bit more to own a brand new car instead of the same car that is 2-3 years old, there are several reasons I'm aware of why people buy new cars:

  1. They value features not available on older models, such as technology or safety features
  2. They want the styling of a specific new model and aren't open to considering other models
  3. They are able to get financing and are making a decision based on their monthly payment rather than the total cost of the loan (special note - there is no such thing as 0% financing - you aren't getting free financing, the bank and auto dealer have just built their profit into the base price of the car, which you could negotiate down if you paid cash)
  4. They want to avoid the uncertainty of buying a used car in unknown condition from a seller of unknown trustworthiness.

Number 4 is probably the biggest reason, and many people are willing to pay for the certainty of knowing that the miles are correct, the parts are new, the car is in good working condition, etc. Additionally, some makes of cars have much higher resale values than others (such as Hondas), meaning that there isn't as large of a drop in price between a new car and a used car.

Many people consider buying a new car the best way to ensure they get the best reliability since they know the initial condition of the car and can care for it meticulously from that point on. This can especially make sense when the buyer intends to keep the car for the like of the car as the buyer will then benefit from having no car payments once it is paid off.

Buying Used

Buying a used car is the most affordable option, but for a given quality of car the reliability can be a significant potential pitfall. It can be very difficult for a non-professional to tell whether they are getting a good value. Additionally, it is hard for an owner who wants to sell a used car in excellent condition to get the true value of the car, and much easier for an unscrupulous seller to to get the market price by selling to an unaware buyer (the "lemons" problem in economics). You could buy an inspected car with a limited warranty from a retail seller like CarMax or a dealership, but you often pay a significant premium that cancels out much of the biggest reason to buy used - saving money. However, there is an opportunity to save money when buying used if you're willing to compromise on the condition of the car (if you don't care whether a car has hail damage, for example), or if you are able to wait until you find a motivated/distressed seller who needs to sell quickly and is willing to sell at a discount.

If cost is your primary priority, buying a used car is likely the best option, but I would recommend the following in all circumstances:

  1. Pay an independent mechanic to perform a full inspection
  2. Request that the seller contract to take the car back or pay for repairs if there are major issues within the first few months (engine, transmission, etc.)

If the seller isn't willing to offer both of these, I would walk away. When buying used, you will also need to consider maintenance, which will vary significantly based on the make and model of the car as well as the condition, which is another risk you need to be willing to take on if you choose to buy used.

  • I agree, thanks for the confirmation (you confirmed exactly what I was thinking, and brought to light a couple of points I hadn't considered). I asked the question for myself but also wanted to keep it general enough for others to benefit from as well. – MDMoore313 Apr 11 '13 at 19:48
  • Happy to help. Thanks for contributing to our community with your question. – JAGAnalyst Apr 11 '13 at 22:12
  • Your just giving this advice away for free? Good grief? Seriously though, well thought out answer. Now excuse me while I go look up the "lemons problem".... – SoftwareSavant Feb 20 '14 at 2:15
  • You probably should talk about maintenance costs a bit more, on of the reasons I bought a new car was that unexpected repairs increase in frequently as the car ages. – Andy Jan 2 '15 at 23:54
4

I think you're dancing with the line here, this question is hard to back up without opinions and could really be three different questions. I'm going to push aside the part about quality and reliability, that could be an emotional subject.

So from a price standpoint, there's virtually no disagrement that it makes financial sense to buy a used car instead of a new car. The majority of new cars lose the majority of their resale value within the first year or two. If you purchase said car after someone else has used it for the first two years, you just avoided all of that depreciation yourself, and you're still going to be purchasing a perfectly reliable car as long as you are diligent in the buying process.

  • While "quality" is subjective, isn't reliability pretty measurable? In the U.S. Consumer Reports and Edmunds have good data and recommendation about the reliability and predicted reliability of vehicles. – MrChrister Apr 11 '13 at 19:39
  • 1
    "lose the majority of their resale value within the first year or two" is simply incorrect. It takes something like three years for an average car to lose half its value. – stannius Sep 13 '13 at 16:11
  • 1
    year or two or three. Are you really going to split hairs with me over that. – Scott Hillson Sep 13 '13 at 18:07
  • Two years in a new car still likely has its warranty, three and four its probably gone. – Andy Jan 2 '15 at 23:55
3

Rule of thumb is always BUY, NEVER lease, unless you plan to use it for a business where you can expense the lease payments.

Leasing is the biggest scam. Lease is just a fancy word for renting and the dealerships PRAY that people like us lease.

As for new or old, new cars have better warranty but you may get a great deal on a 1-3 year old used car.

  • 2
    Leasing can be the best deal for the right kind of car driver. However though those circumstances are few and far between and your proposed rule isn't a reckless one. – MrChrister Apr 11 '13 at 19:37
  • can't you depreciate a car if you buy it for business? – Vitalik Oct 17 '13 at 15:54

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.