It doesn’t take a rocket scientist to know that buying a used or pre-owned car can save you money off a new car’s sticker price. But buying an older vehicle can also add up to savings on your auto insurance and taxes as well.
In a recent NerdWallet.com study that examined California insurance rates on a Toyota Camry vehicle, the company found that insurance savings based on how old the vehicle was is a major factor in premiums.
The cost of insuring a 2015 Camry in the West Coast state costs an average of $1,522. The savings on buying a 2012 or 2013 car was about a 14 percent savings, resulting in a $1,304 premium. In fact, premiums dropped by as much as 30 percent for those willing to purchase a 10 year old Camry, according to NerdWallet.
So why is it less expensive to insure an older car? Simply put, it costs more to replace a newer car than an older one.
In general, calculating whether a used or new car is a better investment requires some math. There are benefits and drawbacks to both.
The benefits of a new car typically include fewer repairs, decreased loan interest rates, a better warranty and some insurance discounts a driver receives by having state-of-the-art safety technology (assuming a new car has them installed). Drawbacks of paying for a new vehicle are there too. These drawbacks include the extra cost of buying new, sales and excise taxes (if your state taxes auto purchases), the cost of depreciation, and of course the higher price of insurance.
Conversely, older cars run the risk of more repairs, fewer opportunities for safety discounts on your insurance, and higher loan interest rates.
Financing New, Leased, or Used
The car site, Edmunds.com, examined three financing methods for both used and new cars. They reviewed the cost of a 2015 Honda Accord EX sedan based on a sticker price of $24,985. They examined three different scenarios:
- Leasing: Using incentives and rebates available at the time of the article, they calculated a three year lease with no drive-off fees would cost $339 monthly (that includes California taxes).
- Buying New: Choosing a five-year loan with a 20 percent down payment of $4,997 and interest rate of 2.99 percent would cost $396 each month.
- Buying Used: In this case, they chose the 2010 Accord EX for a price of $17,108 with a four-year loan and 10 percent down ($1,710). They financed the car at 3.5 percent for four years and got a monthly payment of $372.
What was the result? Comparatively, leasing cost $4,372 less than buying a new car but buying used was the least expensive option by far. Buying the used car saved $4,818 over leasing and $9,190 less than buying new.
How to shop for a used car
If you’ve decided buying a used or pre-owned car is for you, you should know how to shop for one.
First, know the difference between used and pre-owned. Many used car buyers look for “Certified Pre-Owned” vehicles, which many believe minimizes the risk involved with buying an older car or truck. These vehicles cost a bit more, usually, because the vehicle meets age and mileage requirements and has gone through a thorough inspection process at a dealership. It may also get an extended limited warranty, according to Edmunds.com.
“CPO doesn’t stand for “Car Perfection Opportunity,” Edmunds.com adds. “But it’s hard to fault consumers for thinking that it might. Every advertisement would have you believe that a CPO vehicle is just like new. Ultimately, though, a CPO car is still a used car.”
The auto website, Jalopnik, offers 10 tips for shopping for a used car. Here are some of their recommendations:
- Research: Learn about the model of car you’re interested in, its repair history, and more. Look up its value on sites like Kelley Blue Book to know if the seller is offering fair value. That’s typically a starting point before you negotiate. Also check online forums about the car model to see what current and former users have to say about the vehicle’s repair history and performance.
- Budget: Follow your budget. Know what you can afford and stick to it.
- Use a mechanic: After you test drive it, kick the tires, look for rust, etc. then use your own mechanics to comb through the car. A car is a big investment and your mechanics will most likely find anything major wrong with the car.
- Find out what certified means: Certified may mean slightly different things at different dealerships. Have the seller explain exactly what they mean by “certified”.
- Shop for financing: The dealer many times won’t have the best interest rates so check with your bank, credit union or even your auto club for financing options.
Finally, don’t fall in love with the car and buy on impulse, Jalopnik says. You have to be willing to walk away if the car isn’t a perfect match.