Why Buying a Used Car Makes Economic Sense

It’s been a tough few years for car buyers. Pandemic-related chip shortages sent car prices soaring. Russia’s invasion of Ukraine in 2022 only made things worse.

However, the dust may be settling on car prices -- especially used car prices.

According to CarGurus, the average used car price has been on a downward trend since last summer. As of 2 January 2024, it’s $28,247.

While that may sound high, it’s nearly $20,000 lower than the average new car price, which is over $48,000, according to Consumer Reports.

The truth is that buying a used car is almost always cheaper than buying a new one (unless it’s a luxury or collectible car that appreciates in value). It often means getting more bang for your buck.

But now that used car prices have fallen more rapidly than new car prices have, buying a used car may be an especially good deal.

On top of the lower sticker price, used cars have other cost benefits. For one, they depreciate at a slower rate. According to Kelley Blue Book, cars typically depreciate by 20% in their first year (about 11% is lost as soon as you drive the car off the lot). After that, they lose about 60% of their value within the first five years (about 10% per year).

This means that buying a brand-new car makes the least financial sense because you’re taking the biggest immediate loss. For example, 11% on a $50,000 car is $5,500.

By buying a car that’s at least a few years old, you’re letting the previous owner take the biggest depreciation hit.

According to Tiger Okeley at used car dealership Oak Motors, “Depreciation is an unavoidable part of car ownership. But savvy buyers know they can get a major discount by buying a used car with under 60,000 miles (the equivalent of the average annual mileage of 12,000 miles x 5 years). It costs far less than a new car, but it’s still in relatively good condition.”

Another (related) reason that buying used makes economic sense is the reduced tax burden and lower dealership fees. This is because the car sales tax and (sometimes) the dealership fees are based on a percentage of the sales price.

Car sales tax rates vary by state and fall between 0% to 8.25%. The national average rate is 4.99%. Similarly, documentation or conveyance charges by car dealerships are typically 1% to 3%.

So by buying a (cheaper) used car, you’ll automatically incur lower transaction costs.

Don’t have enough money to buy a used car outright? You can always finance it. Car loans aren’t limited to new cars. In fact, some used car dealerships even offer buy-here pay-here (BHPH) financing that caters to buyers with low income or credit.

Finally, used cars also tend to cost less to insure. Again, this is due to the lower value of the car compared to a new car. However, keep in mind that the cost of car insurance also depends on other factors: your age, driving history, credit score, location, and more.

You can also get different levels of car insurance coverage. Most states require at least liability coverage, but you can also pay extra for collision coverage, personal injury protection, or comprehensive coverage. Once you know what type of coverage you want, you can call around to compare quotes from different insurance companies.

Bottom line: The cost of a used car can vary widely. But nine times out of ten, it’s going to make more economic sense than buying the equivalent new model -- especially now that used car prices are falling at a faster rate than new cars.

That said, if you’ve settled on buying a used vehicle, be sure to do your diligence. Not every used car is made the same.

For one, some models have better reputations than others. One benefit of buying used is that you can check user reviews and recall histories to see if a particular car model is known for having any issues.

Secondly, some used cars may not have been taken care of very well by the previous owner. Request a vehicle history report to learn about its past accidents, title, mileage, and more. Then, get the car professionally inspected by a reputable mechanic. They can alert you to any potential red flags.

Another way to verify the value of a used car is to plug its model, year, and other details into sites like Kelley Blue Book and Carfax. They’ll give you an estimated value range for the car to help ensure you don’t overpay. You may also want to consider buying a certified pre-owned vehicle, which is guaranteed by the original manufacturer.

Whatever you do, remember that used car prices are always negotiable. So never be afraid to ask for a lower price. You never know how desperate the owner is to sell. And right now, it looks like many are.

Image: Library of Congress

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