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When it's time to replace your car with something new, you're going to want to save as much money as possible. But that might not be as simple as you think.
Chances are, buying a car for a great price will take more than just haggling over a couple hundred bucks with the salesperson, or calling around to a few different dealers. You can save a lot of cash if you play your cards right, but the key is knowing where there's real money on the table.
For most people, cars are your second biggest expense (after
housing). We either love cars or love to hate them, but either way, we
spend a lot of money on them.
Consider how much you can afford before what kind of car you want.
From a financial point-of-view, the less you spend on a car, the more
money you have left over for everything else.
Vehicles are not an
investment. It’s an emotional thrill to buy a new car, but a used car
is a far better value. If you do decide to buy used or lease,
remember that a good car salesman will steer you towards the most
expensive options. Know your number first so you don’t overspend later.
How Much Can You Save Buying a Used Car?
If you want to maximize savings when buying a car, the best strategy is
to purchase a 3 to 4 year old used car and consider buying an extended
warranty to minimize future repair expenses.
The biggest cost of owning a car is the depreciation (the loss in value as it gets older).
Most new cars depreciate 40% to 50% during the first three years of
ownership. With an average selling price of around $30,000, that's
$15,000 in depreciation cost.
A three year old used car sells for an average of around $16,000 and
will depreciate roughly 25% during the next three years of ownership.
This amounts to about $4,000 in depreciation costs.
A new car not only depreciates quicker, but is twice as expensive to start with.
Before you get too excited about buying used, you should be aware of some of the factors that narrow the cost savings a bit.
First, if you plan on financing the vehicle, be aware that most lenders
charge a higher interest rate on used cars - especially if they're older
than 10 years or have more than 100,000 miles.
The difference in rates can be as much as 3%, so if you get a car loan
with lengthy terms such as 48 months or longer, this can add over $1,000
to your cost when compared to buying new.
Used cars also have higher repair and maintenance costs. Most
bumper-to-bumper warranties only cover the first three years of a
vehicle's life.
You could potentially incur some very large repair expenses. This is why
I recommend buying an extended warranty
with coverage up to 100,000 miles. This will typically cost between
$1,000 and $2,000 depending on the make and model you purchase.
Another thing to keep in mind is the length of time you're planning to
keep the vehicle. If you usually keep it until the wheels fall off, one
can argue that buying new may be the better option.
Owning the same vehicle for 8 years or longer results in a much smaller
yearly depreciation cost than if you only kept the car for 4 years or
less - and you have the added peace of mind knowing it's been maintained
and taken care of during its entire life, thus minimizing future repair
costs.
One last thing - don't assume that all used cars are less expensive than
new. Due to the higher demand of used vehicles in recent years, there
have been cases where a 1 year old used car costs more than buying the
new version.
This is due to the higher cost of financing on the used model coupled
with large incentives on the new model. Therefore, if you want to truly
save money buying used, you really need to consider a car that is at
least 3 years old.