There is a lot to consider when buying a car, including your budget, the type of car that suits your lifestyle and what kind of financing you may need. You might also benefit by weighing the pros and cons of buying a used or new car.
Often, opting for one over the other comes with a considerable difference in the upfront price of the vehicle. Additionally, if you plan to get an auto loan to purchase a car, you will want to determine if you should buy a new or used car ahead of time. Auto loans vary based on this factor, with loans for used cars typically charging higher interest rates.
Other factors may also sway your decision, including how long you intend to keep the car, ongoing insurance and maintenance costs, the features you need and the condition of the car you're thinking about buying.
Quick Comparison Between a New and Used Car
According to Kelley Blue Book, the average cost of a new car in the U.S. stood at $48,681 in November 2022. The average cost of a used car, on the other hand, was $27,564 in the preceding month. That's a difference of over $21,000.
But the purchase cost is only part of the equation. If you're wondering how to choose between a new car or a used car, start by comparing your options across a few basic parameters, such as how much you’d pay for a comparable model and ongoing maintenance costs.
New vs. Used Cars: Costs and More
What to Expect When Buying a New Car
When you buy a new car, you can expect your car to come equipped with the latest technology. New cars also come with comprehensive warranties, and some manufacturers provide roadside assistance. Both offer considerable peace of mind and keep your maintenance and repair costs to a minimum.
New cars come with the latest features. These may include reverse brake assist, cabin air purification, 360-degree parking cameras, video rearview mirrors, voice activation, wireless smartphone charging, remote control parking and autonomous safety systems.
New cars tend to come with powertrain and bumper-to-bumper warranties, although the time frame and miles covered may vary from manufacturer to manufacturer.
People looking for new cars may benefit through various deals, including low interest rates and introductory 0% APR offers, especially if they have excellent creditworthiness. In addition, lenders tend to offer lower interest rates to borrowers who purchase new cars as opposed to used ones.
The total cost of ownership of a new car depends on the purchase price, depreciation, operating costs, financing costs and years of ownership. New car owners must worry about depreciation, which kicks in soon after a car leaves a dealership. While repair and maintenance costs remain low during the warranty period, they increase as the car ages. According to AAA, the total cost of ownership for new cars stood at $894 per month in 2022.
New cars come backed with warranties, which help address concerns related to quality, condition and reliability. Several manufacturers also provide roadside assistance for predetermined periods. Besides, should anything go wrong, you may turn to the manufacturer for assistance without worrying about spending a lot of money.
Pros and Cons of Buying a New Car
Evaluating the benefits and drawbacks of buying a new car is important because you typically pay considerably more than you would if you purchased a used car. Besides, buying a car is possibly second only to buying a home when it comes to the money you need to spend, so the process requires due diligence.
What to Expect When Buying a Used Car
What you can expect when you buy a used car depends largely on the car you purchase. For example, while one used car might serve you perfectly well for years on end, another might start giving you trouble much sooner. As a result, you need to ensure buying a used car that passes all the required checks.
The features you can expect from a used car depend on the make and the model, with older cars coming with fewer modern-day features. However, you may get a feature-loaded car if the one you purchase is a year or two old.
Used cars that come with low mileage and are a few years old might still receive coverage through their original manufacturer warranties. However, there are instances when only first owners may receive the benefits of manufacturer warranties.
While you usually have multiple financing options when buying a used car, promotional offers are hard to find. You may also need to pay a higher interest rate than you would if you get an auto loan for a new car.
Buyers of used cars don't have to worry about depreciation as much as new car buyers. However, they typically have to deal with rising repair and maintenance costs. State Farm lets you calculate the cost of ownership for used and new cars based on factors such as purchase price, down payment, loan term, interest rate, monthly costs, annual costs and the number of years you plan to hold on to the car.
J.D. Power advises that well-maintained modern vehicles can last up to 200,000 miles without experiencing major issues. But quality, condition and reliability vary greatly from one used car to the next, so it's best to exercise due caution before making a purchase. Certified pre-owned cars serve as the ideal middle ground because they meet manufacturer standards.
Pros and Cons of Buying a Used Car
While buying a used car comes with its fair share of advantages, there are some potential pitfalls you need to be aware of as well.
Used Car vs. New Car: Which Should You Buy?
Determining if it is better to buy a new or used car requires paying attention to your specific requirements and financial situation.
- Assess your wants, needs and lifestyle. While you might want to buy a two-door sports car, it might not work well if it's the only car your family of four owns. Ideally, your car should fit into your current lifestyle. Make a short list of potential makes and models by considering your car's intended use, whether everyday commuting or recreational travel.
- Consider appearance and features. Determine if you want a hatchback, a sedan, a crossover, an SUV, a coupe or any other type of car. Then, decide on the features you want and actually need. These may include anti-lock braking, backup cameras, hands-free Bluetooth, sunroofs, climate control and navigation systems. Bear in mind that while some of these features come as a staple with new cars, that’s not necessarily the case with used cars that are a few years old.
- Determine your purchasing budget. Establish how much you can afford to pay each month toward your car loan. Once you have decided on your budget, choosing between a new and a used car might be more straightforward.
- Calculate car ownership costs. Since car ownership costs may vary considerably between new and used cars, it's important that you account for all associated ongoing costs at the very onset.
Buying a Car With an Auto Loan
Getting an auto loan is not as complicated as you might imagine, especially when you know what steps to follow. For instance, ideally, you should begin the process by addressing the affordability factor and then seek pre-approval from a lender.
Determine what you can afford
Start by looking at your income, existing debt and regular expenses. That will give you an idea of how much you can afford to pay toward your auto loan each month. That, in turn, can help you determine how expensive a car you can afford.
Check your qualifications
Take a look at your credit score, as this will help you understand the types of auto loans you might qualify for. For instance, you need good or excellent creditworthiness to qualify for most conventional car loans. Besides, people with no credit history get fewer options and often must pay higher interest rates.
Get pre-approved
Getting pre-approved for an auto loan helps give you a concrete idea of how much money a lender is willing to loan you. You may then look for cars accordingly.
Pick your car
Decide if you wish to buy a used or new car and narrow down your options accordingly. Compare all the cars you shortlist carefully to make your final selection.
Review and pick a loan offer
Take time to go through the loan offer in detail and understand all the fine print. Make sure you're aware of all applicable fees and taxes in advance. If you have more than one loan offer, compare them across parameters such as interest rates, fees and flexibility in terms.
Close the auto loan
After selecting and reviewing your loan offer, sign on the dotted line to complete the process.
FAQs About Getting a Car Loan to Buy a Car
Check answers to other commonly asked questions about whether you should buy a used or new car to determine the best way forward.
Dealer financing allows you to complete the entire car-buying process in one place. However, dealers commonly take commissions or add markups to interest rates, which make your loan more expensive.
There is no single best way to finance a car because the process depends on multiple factors. If you have good or excellent creditworthiness, getting a car loan from a bank or a credit union might be the most affordable option. People who have not built their credit histories yet may benefit by looking at what no-credit auto loans have to offer.
A car loan enables you to purchase a car by getting the required money from a lender. Going forward, you must make monthly payments until you completely repay the loan. This includes the principal amount, interest charges and potentially other fees.
What happens after you are approved for a car loan depends on the loan you get. For example, if you get a dealership loan, there's a good chance that the lender will transfer the funds directly to the dealer. If you get a car loan from a bank or a credit union, the approved funds might make their way into your bank account first, after which you may transfer the same to the dealer. Going forward, you need to make repayments directly to the lender.
A lender may deny your car loan application because of an error or more in your application. In this case, fixing the error might make you eligible. Having poor or average credit could be another reason, in which case you may want to improve your credit score before trying again or look for options based on your existing credit score. Alternatively, getting a co-signer might improve the odds of success when you apply again. A large amount of existing debt, or a high debt-to-income (DTI) ratio, might also work as a deterrent, in which case you will need to reduce your debt before applying again.
Go through the vehicle's history, not just by getting information from its existing owner but also on your own. You can do this online using the vehicle identification number (VIN). Check how many miles the car has traveled. Inspect the car's exterior and interior, looking for leaks, rust, paint damage, frame issues and other problems. Check the condition of the tires. Look under the hood to check for cracked belts/hoses and corrosion. Take a test drive. If a car you like gets to this stage, get a mechanic to give it a once over.
Learn More About Auto Loans and Insurance
About Christopher Boston
sources
- Kelley Blue Book. "Average New Car Price Sets Record." Accessed February 14, 2023.
- Kelley Blue Book. "Average Used Car Price Falls Under $28K." Accessed February 14, 2023.
- AAA. "Annual Cost of New Car Ownership Crosses $10K Mark." Accessed February 15, 2023.
- Kelley Blue Book. "How to Beat Car Depreciation." Accessed March 29, 2023.
- J.D. Power. "How Many Miles Are Too Many For A Used Car?." Accessed March 29, 2023.
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