Buying a New Car

A major disadvantage to buying a new car is the rapid depreciation it undergoes in the first few years. Models typically lose about 45 percent of their value in the first three years, compared with 25 percent over the next three.

Determine whether a used car is right for you

Used vehicles are often the best values you'll find in the automotive market. This is especially so for late-model ones. Not only is the price lower than a comparable new car, but ownership expenses such as collision insurance and taxes are lower, and a used vehicle has already taken its biggest hit in depreciation. In addition, buying used is often a way to get a better-equipped vehicle than you'd be able to afford new.

But buying a used vehicle is an exercise in finding the right balance of value and risk. Following are some issues to consider.

Reliability

One thing that has made used cars more appealing is their improved reliability. In an analysis of Consumer Reports annual subscriber surveys from 1980 through 2000, we found that the reliability of vehicles had vastly improved. Reported problems declined to a fraction of what they were in 1980. Rust and exhaust-system problems, once common, are now no longer a major concern. As a result, buying a late-model used vehicle is not as much of a risk as it used to be. When properly maintained, today's vehicles should easily go well past 100,000 miles, and many could reach 200,000 miles without a major breakdown.

Warranties and repairs

Although used cars are more reliable than ever, maintenance and repair costs are important considerations.

In the first two or three years of a car's life, it has fewer problems and is typically covered by a comprehensive warranty. A used car, on the other hand, is either close to coming off warranty or already off it.

This means that owners will have to pay for repairs out of pocket, but most costs will probably go to replace parts like tires, brakes, or a battery—high-wear items that often aren't covered by a warranty anyway. The expense of replacing all of them, if necessary, would still be relatively modest considering the overall savings from buying a used vehicle.

There is always the risk that you'll buy a lemon. Even a car with a great reliability history can be a risky proposition if it was abused by a previous owner or if previous damage has been hidden. By giving the car a careful inspection yourself and having the vehicle thoroughly inspected by a qualified mechanic, you can usually get a good idea of the car's value.

Depreciation

A major disadvantage to buying a new car is the rapid depreciation it undergoes in the first few years. Models typically lose about 45 percent of their value in the first three years, compared with 25 percent over the next three. But this varies greatly among models. The 2004 BMW 3 Series, for example, has held its value relatively well (about 25 percent depreciation over the first three years), while the 2004 Cadillac Seville has depreciated rapidly (about 60 percent).

Several factors determine depreciation, including the model's popularity, perceived quality, supply, and whether or not the vehicle is of the current design. The average depreciation on a $27,500 vehicle leaves little more than $15,000 after three years, a huge hit in residual value.

Interest rates

Loans for new cars typically have a lower interest rate, but the difference is often not a major concern. In October 2006 the rates for a 36-month new-car loan hovered at 6.8 percent, according to Bankrate.com; a 36-month used-car loan was about 7.8 percent. These two rates are often within just one percentage point of each other, and the additional interest you pay on a used-car loan adds only about $7 to $15 on a monthly loan payment.

Insurance

You'll typically pay less to insure a used vehicle than a new version of the same vehicle. Insurer USAA quoted a New York policyholder with a good driving record $441 for a six-month policy on a 2002 Honda CR-V EX and $483 for a 2005 CR-V, an $84 annual savings.

Safety

Buying a used car means you won't have the latest safety features. Newer features such as electronic stability control (ESC), head-protecting curtain air bags, LATCH child-seat restraints, and advanced frontal air-bag systems are harder to find on older vehicles. But a vehicle with more common safety features such as antilock brakes, traction control, and side air bags will be more affordable on a used car than on a similarly equipped new car.

If you can accept a reliable vehicle that is in less-than-mint condition and you're willing to pay for maintenance and repair costs, your dollars will go further when buying a used car rather than a new one.

Used Car Price Reports
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