Posted by: John S Kiernan

The auto industry has been red-hot in recent years, with more than 51 million new vehicles sold since the start of 2014, according to data from MotorIntelligence. Yet the average vehicle on the road is still more than 11 years old, according to IHS. So it’s clear that both new and used cars have their fair share of fans out there. The question, however, is which type of automobile is the better buy.

There are many factors to consider in answering this question, with the most important being cost and safety. Used cars are obviously cheaper to purchase, but their longevity and maintenance costs can be major question marks. And there’s no telling how much you might lose as a result of not having the latest technological features, such as lane departure warnings and automatic braking. On the flip side, new cars come with some fancy bells and whistles, but they also take a hefty toll on your finances. For example, the average new-car buyer in 2016 took out a $30,022 auto loan, according to Experian, thereby incurring nearly $11,000 more debt than the average used-car buyer.

With these competing arguments in mind, WalletHub surveyed leading experts in the automotive and personal finance industries to get their take on this fundamental issue affecting most families’ everyday finances. You can find their responses and bios below. Finally, if you’d like to join in the debate, just share your thoughts in the comments section at the end of the page.

Why You Should Buy a Used Car

Highlights:

• Cars typically lose the most value during the first five years. For example, if you purchase a model year 2017 new car, it would lose the most value between 2017 and 2022. This means if you have a car loan, you could owe more money on the car than it is worth during this period (that’s why gap insurance was created—which is an additional cost to you).

  Axton E. Betz-Hamilton // Assistant Professor, Eastern Illinois University

• From a family economic perspective, used cars offer both value and flexibility that are difficult to match with new car purchases. Although we’ve either experienced ourselves or know someone who has had negative experiences buying used cars (e.g., unexpected maintenance costs, less longevity of vehicle than anticipated), the potential financial benefits of buying used outweigh those of buying new. This is especially true as you move up the price range for new cars.

  Adam R. West // Certified Family Life Educator and Assistant Professor of Family Studies at Western Kentucky University

• A car is the second largest purchase for a typical consumer, and should be considered carefully from a financial perspective, particularly with consideration of the tradeoff between unfavorable depreciation from a new vehicle (which cannot be avoided) and the risks taken by purchasing a pre-owned vehicle (which can be somewhat controlled and mitigated).

  Laine Mears // SmartState Professor of Automotive Engineering, Clemson University - International Center for Automotive Research

< >

• James D. Halderman Author and Former Professor of Automotive Technology
• Axton E. Betz-Hamilton Assistant Professor of Consumer Studies at Eastern Illinois University
• Adam R. West Certified Family Life Educator and Assistant Professor of Family Studies at Western Kentucky University

James D. Halderman Author and Former Professor of Automotive Technology Did you know that everyone drives a used vehicle? As soon as a new vehicle is driven out of the dealership, it is used and its value drops. Used vehicles including cars, trucks and SUVs are less expensive to purchase and if three years old, can often be purchased for half of what it cost when new. For example, David is a company service representative and travels a lot (about 40,000-50,000 miles a year). He does not want to purchase a new vehicle because it would soon be out of warranty and in his opinion, a waste of money. However, he was not comfortable trying to find a good used car because he does not know what to look for when inspecting a used vehicle. After checking with several automotive-knowledgeable people, he decided that the best plan of action was to purchase a used vehicle that was returned after three-year lease and was “certified” by the dealer and the factory. Being a certified used car, it had to meet stringent requirements and be free from any mechanical, body or interior faults and be accident free (have a clean “Car Fax”). He was very pleased with this decision and happy knowing that he has a reliable vehicle that looks almost new and still met his budget. Things to consider when thinking whether or not to purchase a used vehicle include:

• A used vehicle often is sold as a certified used vehicle, especially those returned after a lease and offered with a warranty that is often longer than the original factory warranty.

• Many high cost options are included at a fraction of their original cost and often at no additional cost at all. Therefore, if a potential vehicle buyer wants some or many of the high cost options such as heated and cooled seats, navigation or radar cruise, backup camera, then purchasing a used vehicle is a wise decision.

• The selection is almost as good as and often better than purchasing a new vehicle. While this does not seem right, Automotive News stated that 95% of new vehicle purchases are made from the selection on the dealer’s lot. While purchasing used does not allow the buyer to select the exact vehicles and color wanted, often the selection is very good.

Most people cannot tell what year a vehicle is, so if it is clean and well maintained, no one will know that it was purchased used. For those of us that like to keep as much of our hard-earned money as possible, purchasing a used vehicle is truly the wise choice. Axton E. Betz-Hamilton Assistant Professor of Consumer Studies at Eastern Illinois University While there are many positives associated with purchasing a new car, such as a warranty, a major downfall is cost. New cars typically cost over $20,000 and start to lose value as soon as you drive it off of the dealership lot. Cars typically lose the most value during the first five years. For example, if you purchase a model year 2017 new car, it would lose the most value between 2017 and 2022. This means if you have a car loan, you could owe more money on the car than it is worth during this period (that’s why gap insurance was created—which is an additional cost to you). To avoid the substantial loss in value of a car during those first five years, it is advisable to purchase a used car that is at least five years old. When shopping for a used car, be sure to research reliability ratings online and research the value of used makes and models you are interested via Kelly Blue Book. Kelly Blue Book provides the option of comparing values of used cars for sale at dealerships versus those for sale by private owners, so you can be aware of what is considered to be a “fair” price before you begin the negotiation process with a seller. Before purchasing a specific used car, take the time to open the hood and check the oil, transmission fluid, and brake fluid. Check hoses for cracks. Also, run a CarFax report to see if the specific vehicle you are interested in has been involved in any accidents or has had flood damage. Taking the time to do these tasks will help you make a fully informed purchase decision. Finally, used cars typically cost less to insure than new ones. With some extra time, effort, and some basic car maintenance knowledge, you can save yourself a lot of money by purchasing a used car. Adam R. West Certified Family Life Educator and Assistant Professor of Family Studies at Western Kentucky University The discussion about whether to buy new or used vehicles is often a divisive one. Some base their arguments on personal experiences (e.g., growing up in a household that always bought new cars) and others cite stereotypical evidence (e.g., used cars are others’ cast off problems). From a financial point of view, I side with the argument that used cars are a better buy than new cars. From a family economic perspective, used cars offer both value and flexibility that are difficult to match with new car purchases. Although we’ve either experienced ourselves or know someone who has had negative experiences buying used cars (e.g., unexpected maintenance costs, less longevity of vehicle than anticipated), the potential financial benefits of buying used outweigh those of buying new. This is especially true as you move up the price range for new cars. Value New vehicles have an initial depreciation value of approximately 20%, as they immediately move from being classified as “new” to “used” the very minute that you are handed the keys. Couple that with a roughly 5 to 10% increase in sale price over the dealer invoice, and consumers end up paying quite a bit more than the initial car value. New cars typically require little maintenance in their first few years, and with the increases in technology and reliability, newer used cars (e.g., within the last decade) still offer some of the same minimal maintenance benefits of brand new cars. The savings realized from purchasing a used car versus a new car allows families flexibility with their future budgets and spending plans. Flexibility Because used vehicles are less expensive than their new counterparts, the decision to purchase a used vehicle allows more wiggle room in the family budget. With lower monthly car payments, more money is available for other family needs within the budget. Likewise, although depreciation is not uniform across manufacturer, makes, or models of cars, some vehicles hold their resale value longer than others of the same model year and odometer reading. The higher possible resale value gives families options as they decide whether to trade-in, sell, or keep their vehicles. And regardless of the overall economic conditions, families fare better when they have realistic financial choices and options. Either way, the decision to buy a car, new or used, must be consistent with and fit within a family’s needs, goals, and most importantly, budget. Why You Should Buy a New Car

None of the experts we reached out to believe that buying a new car is definitely the way to go. Maybe you can make a case in the comments section.

Why It Depends on the Situation

Highlights:

• Individuals differentiate on new and used vehicle purchases largely because of depreciation and maintenance. Depreciation is the single largest expense of new vehicle ownership and the hidden loss in a car’s value may not be recognized until the individual is ready to trade-in. Maintenance on used vehicles require time and money. Unlike depreciation, repairs and maintenance are costs that must be addressed as they arise. Both costs will affect your personal budget.

  Wayne R. Hamric // Administrator, Office of Motor Vehicles, Arkansas Department of Finance & Administration

• Rational consumers will see that the implicit value in buying new, which includes a car warranty and newer technology features, tilts against pre-owned vehicles. As the cost of the used car trends towards 50% of the new, the used car becomes more desirable as first year depreciation fears on the new car will overshadow the gratification of having the latest, greatest ride.

  Kirtlund (Kirt) Frye // Director, Greater Cleveland Automobile Dealers' Association

< >

• Laine Mears SmartState Professor of Automotive Engineering in the International Center for Automotive Research at Clemson University
• Kirtlund (Kirt) Frye Director of the Greater Cleveland Automobile Dealers' Association
• Wayne R. Hamric Administrator of the Office of Motor Vehicles at Arkansas Department of Finance & Administration

Laine Mears SmartState Professor of Automotive Engineering in the International Center for Automotive Research at Clemson University Used Car Purchase as a Viable Alternative to New: Financial Aspects to Consider A car is the second largest purchase for a typical consumer, and should be considered carefully from a financial perspective, particularly with consideration of the tradeoff between unfavorable depreciation from a new vehicle (which cannot be avoided) and the risks taken by purchasing a pre-owned vehicle (which can be somewhat controlled and mitigated). Consider the following points around purchasing a used vehicle: Benefits

• Someone else absorbs the high depreciation at the start of life.

• Any transient issues, recalls and bulletins have a high probability of having been addressed.

• Any systemic observations on the vehicle model (e.g., performance and safety ratings, design issues) are apparent and documented to help with your buying decision.

Considerations

• Older cars do not incorporate all of the latest technologies, such as compatibility with handheld embedded devices (e.g., not able to take advantage of the latest iPhone features) or emerging features (e.g., adaptive cruise control and lane departure warning).

• Used cars are available for a reason; sometimes that reason is an underlying issue affecting reliability.

• You have only the selection of what is available; not all options or features that you desire may be included, or you may need to wait for an extended time to get what you want.

• Used cars can be near or past the end of the manufacturer’s warranty period; any new issues that arise could be completely your financial responsibility.

A robust financial strategy is to therefore consider a Certified Pre-Owned (CPO) vehicle from a dealership. These cars are typically 3-year lease returns that are refurbished and checked by the dealer, and sometimes come with major updates and replacement parts at no additional cost (all recalls must be complete before the sale is permitted). Also, the full vehicle maintenance record is typically available so you have specific information to support your decision. However, most importantly, such vehicles come warranted for an additional period (sometimes for a longer period than the original factory warranty!), and for some manufacturers programs such as prepaid maintenance or tire/wheel protection can be added at the time of purchase. These cars (and these programs) come at a marginally higher cost than buying from a private owner, but the security more than makes up for the reduction in risk (though there is still a degree of inherent uncertainty in the reliability). This approach provides a path for one to own a more luxurious (or lower-price) vehicle than could be purchased new, with the security of covered protection for an extended period. Kirtlund (Kirt) Frye Director of the Greater Cleveland Automobile Dealers' Association There are two important factors to consider when choosing whether to buy a new or used car. The first is how much the manufacturers are willing to incentivize consumers to buy new over used. Without getting into the debate of new lease vs. purchase vs. paying cash, the general rule of thumb is that consumers will trend towards new when the average value of a comparable four-year-old model with less than 60,000 miles is 60% or more of the cost of the new car. Rational consumers will see that the implicit value in buying new, which includes a car warranty and newer technology features, tilts against pre-owned vehicles. As the cost of the used car trends towards 50% of the new, the used car becomes more desirable as first year depreciation fears on the new car will overshadow the gratification of having the latest, greatest ride. The second factor is determining where the used car is relative to the new car in terms of the manufacturer’s model upgrade cycles. A new vehicle that is still in the same upgrade cycle as the same-model used car will tend to be less desirable than its used counterpart, as the basic look and technology probably has forced the manufacturer to heavily discount the new models. This in turn pushes down the value/market value of the pre-owned version, leaving the used car more desirable especially with the advent of certification programs and available long-term "wrap warranties." Wayne R. Hamric Administrator of the Office of Motor Vehicles at Arkansas Department of Finance & Administration Individuals differentiate on new and used vehicle purchases largely because of depreciation and maintenance. Depreciation is the single largest expense of new vehicle ownership and the hidden loss in a car’s value may not be recognized until the individual is ready to trade-in. Maintenance on used vehicles requires time and money. Unlike depreciation, repairs and maintenance are costs that must be addressed as they arise. Both costs will affect your personal budget. It’s my observation that cars have never been more dependable than they are today. It’s not uncommon for cars to be driven 100,000 miles before needing major repairs. All vehicles require maintenance such as oil changes, tire rotation, and brake replacements. Therefore, if you are on a tight budget, buying a used car may get you the most vehicle for the money and the advantage of the used-car price may also allow you to step up to a nicer model. Although used vehicles typically don’t carry the same warranties as new ones, the original factory warranty is often transferable to a second owner. Purchasing a used vehicle may also translate into lower insurance premiums and personal property taxes. For some people, buying used may not be an option, it may simply be all they can afford, but there are some exceptions.

• Do you have a down payment or a Trade-In with Equity?

• Should you, rather than someone else, take the New-Car Depreciation hit?

• Can you afford to maintain and repair a used vehicle?

• How do you feel about lengthy financial obligations?

Once you have determined that it is time to replace your current vehicle, the next question to ask yourself is: whether to buy new or used. Individuals have different means and length of ownership based on a variety of incomes, needs and lifestyles. Individuals should examine their financial requirements when considering replacing a new or used vehicle. There are many new and used car dealers that have dependable vehicles to meet your needs either way.

Image: OlegErin/iStock.

from Wallet HubWallet Hub


via Finance Xpress