New vs. Used Cars: What’s the Best Choice?

New Cars

• New cars come with the latest technology, safety features, and warranties. They also offer better financing rates and lower maintenance costs early on. However, they have a higher purchase price and depreciate quickly.

Used Cars

• Used cars are more affordable, depreciate slower, and often come with lower insurance costs. However, they may have higher maintenance expenses and lack the newest technology/safety features found in newer models.

Recommendation: Buy a 3-5 year used car with cash

• A used car between 3-5 years old is the most ideal choice for balancing cost, reliability, and modern features. By this age, the vehicle has traversed the steepest part of its depreciation, making it significantly more affordable than a new car, while still being in relatively new or well-maintained condition. Many models in this range also have learning warranty coverage and lower maintenance costs compared to older vehicles. Purchasing the car with cash eliminates interest payments, which maximizes long-term savings.

Purchase Locations:

Dealership

• Buying from a dealership offers the benefit of reliability and warranties, often including vehicle history reports and the option for financing. Dealerships usually sell newer cars in well-maintained condition, and you can also negotiate prices. However, prices tend to be higher, and you may encounter upselling or pressure from the salespeople.

Private Party

• Buying from a private party usually results in a lower purchase price, since the seller does not have overhead costs like dealerships. It can also be a much more personalized experience. However, there is typically no warranty, and you’re more reliant on the honesty of the seller regarding the car’s condition. It is crucial to inspect the vehicle properly when buying through a private party and handle all the paperwork.

Manheim Auction

• Manheim auctions provide access to a wide range of vehicles, often at lower prices. Essentially, it is a wholesale used car marketplace, and so cars here tend to be sold in bulk, meaning there are better deals. However, buying from auction can be risky without being able to thoroughly inspect the vehicle or test it. There’s also the added complexity of auction fees, and most vehicles are sold as is, so caveat emptor.

CarMax & Carvana

• CarMax and Carvana are both popular used-car dealers known for their hassle-free buying experience. CarMax offers a large selection of cars, a no-haggle pricing policy, and a 7-day return option, along with a warranty. Carvana provides a very similar experience. Both also have the convenient option of ordering a car online and having it delivered straight to your door. The downside to both is that their prices tend to be higher than private party or auction sales, and while the buying process is straightforward, there is little to no room for negotiation.

Financing vs. Paying Cash:

Personal Purchase

• Cash
  • Paying cash for a car offers several benefits. You will not incur any debt or interest charges, allowing you to have complete ownership right away. This will provide peace of mind, as you won’t have to worry about monthly payment. However, the downside is that paying with cash will leave you with less money in your savings which could be risky if an emergency arises or if you have other financial goals to tend to.
• Finance
  • Financing a car for personal use can provide more flexibility. By spreading out of the cost of the vehicle over time, you can purchase a car sooner without draining your savings. Financing also offers the chance to build or improve your credit score through staying consistent and on-time with your payment. But, financing a car also means that you will be paying interest which can add a significant cost to the total price of the car. You’ll also have monthly payments, which could become a financial burden if you have an emergency come up. Additionally, some lenders may require you to have full-coverage insurance, increasing your monthly expenses even more.

Business Purchase

• Lease
  • Leasing a vehicle for your business offers several tax benefits. You can generally deduct the full amount of your lease payments if the car is used entirely for business purposes, which helps reduce your taxable income. It also has lower upfront costs and monthly payments compared to purchasing, helping with cash flow. Additionally you have the flexibility to upgrade to newer models. You can also deduct business mileage and sales tax on lease payments. For higher-cost vehicles, though, an “inclusion amount” may reduce the deduction. (The inclusion amount is an additional amount of income that must be reported if the market value of a leased vehicle exceeds a specific threshold.) Leasing is most ideal if you prefer lower initial costs and plan to regularly upgrade your vehicle.
• Finance
  • When you finance a vehicle purchase for your business, you can deduct the interest on the loan, reducing taxable income. You can also depreciate the vehicle over time and potentially deduct the full purchase price under Section 179, subject to limits. Bonus depreciation allows for a large deduction in the first year. Financing is a good option if you plan to keep the vehicle long-term, or need a large deduction to offset taxable income.

Tips for Smart Buying:

• Get pre-approved for a loan
  • Pre-approval helps you know what you can afford and puts you in a better position to negotiate a better interest rate with the dealer.
• Keep it simple at the dealership
  • Focus solely on the price of the car when negotiating. This simplifies the process and prevents salespeople from using other factors to get more money from you.
• Consider European delivery for German cars
  • If you’re buying a German car, take full advantage of European delivery programs, as they can offer significant savings.
• Spend no more than 0.5x of your annual salary
  • The general rule of thumb is to spend no more than 0.5x of your annual salary on a car. However, it’s advised to aim for a lower amount to ensure you aren’t stretching your budget too thin.

Gifting a car

Many of our readers are in the fortunate position where you may want to buy a car for your child. If you wish to finance the purchase because you can get a loan at a lower rate than expected returns in the stock market, you might consider getting the loan in your own name if your child doesn’t qualify for an auto loan, with the intention of signing the title over afterwards.

However, be aware that you cannot gift a car if you do not outright own it. That means if you have a loan on the car, you will have to pay that loan off in full in order to gift the car. Said another way, you can only sign title over for the car if you own it free and clear.

So, if you won’t be paying off the loan and the recipient won’t be assuming the loan or taking out a new loan to pay off your existing loan, can you still gift it? Well, yes and no.

Yes because you can allow your child to drive the car without having her name on the title. However, keep in mind you would still be legally responsible for the loan payments as well as any parking tickets or red light camera tickets, etc. If you want to take it a step further, you can even add your child’s name to the title if you’re either in a state where you possess the title or if the lender allows it (processes vary by state, so check with your locality’s motor vehicle authority). If this is the case, then you would both be on the title and you would both be legally liable for any fines or penalties incurred by the driver.

No because, well, you can’t get rid of the loan if you don’t pay it off by either coming out of pocket yourself or having someone else pay it off for you… So if you want to achieve the end of allowing your child to be the sole party legally responsible, then you’re out of luck.

If you do own the car outright, then things become clearer. You would simply have to contact your local motor vehicle authority to ascertain their procedures for changing title. In some states, a gift to certain family members, including a child, can be done without incurring sales or excise tax. In others, however, tax may be based on the current used car value. Again, check with your state to see what is required. Don’t forget to file a gift tax form if the value of the car is over the annual exemption!