New Versus Used: Budgeting Tips on Buying a Car

New Versus Used: Budgeting Tips on Buying a Car

budget tips on buying a car

With used cars, it's wise to budget for repairs.

While it's possible to walk into a dealership and walk out with a new car, especially if you have the credit, you might want to consider doing some planning to determine how a new or used car will affect your budget. Both carry different costs. "Other than houses, cars are the largest purchases that most people make," points out CPA Steve Mangan.

Down Payment

Whether you're buying a used car or a new car, budgeting for a down payment is the same. The more you have to put down, the less you'll have to borrow and the lower your monthly payments will be. Generally speaking, used cars are less expensive than new cars, so you'll need to save less money. However, Mangan also notes, "Your down payment goes away when your car loses value, so don't throw good money after bad." He adds that "if you can borrow money for less than you earn on your savings, put less down." With a new car, you might also be able to take advantage of manufacturer incentives like rebates that you can use as your down payment, making it possible to buy a new car for less money down than it would take to buy a used one.

Monthly Payments

Three factors go into your monthly payments: how much you borrow, how long you borrow it for and what your interest rate will be. While new cars cost more, used car typically have shorter loan terms and higher interest rates, since they don't have the same useful lives. For instance, if a new midsize sedan may cost $26,000 while a two-year-old slightly used one costs around $20,000, you'd be spending $6,000 more. However, after 20 percent down payments on either, you'd find that the payment on a 60-month new car loan at 4 percent isn't that much more than a 48-month used car loan at 5 percent. The first loan on the $20,800 balance carries a $383.06 payment while the latter loan costs $368.47 on the $16,000 balance. The down payments are similar too - $5,200 for the new car and $4,000 for the used car. With this in mind, you may not have to budget as much more for a new car as you think.

Alternative

CPA Mangan's advice: "Want to save money? Drive a reliable beater." If you bought a $5,000 used car, put 25 percent down and paid 12 percent on a 24-month loan, you'd put only $1,250 down and only pay 176.53 a month. If you're open to driving a low-cost used car, you can significantly reduce the amount you budget for car expenses. And remember: Once you own the car outright, you don't have a payment at all, and you can use that money for something else -- like saving for your next car.

Operating Costs

When you buy a new car, you don't have to budget for repairs during the warranty period. When you buy a used car, you do. With a new car, you could go years without replacing tires, brake linings, clutches or any other consumable parts. For example, Consumer Reports estimates that you spend one percent of the total cost of owning a car on repairs and maintenance in the first year and six percent in the 8th year. If your used car is reliable, you can beat these numbers to some extent, but owning a used car without warranty coverage means that you should set aside a portion of the money that you're saving on monthly payments or on down payments for repairs. Mangan adds that you should "ask yourself what it would cost you in missed work if your car broke down and you couldn't repair it," adding that "saving for repairs pays for itself since, if you don't have to do them, you still have the money."

Depreciation

Unless you buy a collectible vehicle, your car will lose value every year that you own it. And, although this depreciation happens on paper, you do have to take your car's current value into consideration, because some day you'll need to replace it. According to AAA's 2013 "Your Driving Costs" survey, a small sedan experiences $2,402 in depreciation per year while a sport utility vehicle depreciates at a rate of $4,798 per year -- and the newer a car is, the more it depreciates. There's a bigger drop in value the first year you own a new car than say, the eighth year. With this in mind, consider making a plan for when you will replace your car, considering the value of what you have to sell or trade in.

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