Purchasing a car can give you the freedom to move around town at your convenience, and can be a huge boon to your quality of life. Here are four reasons why purchasing a used car could be a good fit for your personal finances.
Driving a sleek new car certainly can be stimulating for your senses, though it is not always the best financial decision. Here are some reasons why a used car could be a better choice for you.
Lower Prices
The biggest advantage of purchasing a used car is the lower sticker price. New cars that have just rolled off the production line are more expensive than those which already have some miles under their hoods.
Buying a used car will allow your car-buying funds to travel further, resulting in getting a more expensive brand or additional accessories.
However, the cheaper prices will end up costing you if you purchase a lemon that requires significant maintenance. To avoid surprises, you should check the history of your prospective purchase by using the car’s Vehicle Identification Number (VIN). If it was involved in accidents, was in a geography where a natural disaster occurred, or has other red flags, your initial savings might turn into higher payments down the road.
There are a number of government-approved providers of vehicle history reports, which can be found on the National Motor Vehicle Title Information System website.
Depreciation Not a Concern
A car—unlike a house—is a depreciating asset, and a new one will lose value immediately after it rolls off the car lot. New cars can be expected to decrease in value by 10-20% during their first year on the road, though this drop-off can be even steeper for some makes and models.
Depreciation tends to flatten out the longer the car has been around, with the subsequent drops in value less intense after the first few years.
Especially if you are not planning on reselling or trading in your car in the near future, the book value of your used car will not be an issue. Your priorities will be on making sure that the car can safely and reliably serve your transportation needs, not on how much you will be able to subsequently sell it for later on.
Cheaper to Insure
The expenses do not start and stop at the dealership. The value of the car is one of the factors involved in the insurance you will need to purchase.
Because the value of the car will decrease the longer it is on the road, the expenses involved in insuring it will also fall. This makes your overall vehicular costs less burdensome.
Those seeking to insure a new car might even get hit twice when they purchase insurance. First off, they will need to pay higher insurance premiums. Second, if new car buyers use financing to complete their purchases, they may need to acquire additional gap insurance. Though a $25,000 car will immediately lose value the second it leaves the car lot, the value of the loan obligation remains the same.
Insurance companies will compensate you based on the value of the cost of replacing the car when an incident occurs. Therefore, you may find yourself needing to take on additional insurance to pay for the ensuing “gap” between a future insurance payout and your total debt obligation.
You Can Avoid Taking on Financing
Financing large purchases can help you to come up with the money required to clinch a sale. Perhaps, these monthly auto loan repayments will fit nicely into your budget. TipRanks’ auto loan calculator can help you to understand how these payments will impact your finances.
However, you might be able to purchase a used car with the cash you have on hand. The money you save can be used for other spending or savings needs.
For instance, let us say that you have $15,000 saved to buy a car. For this sum, you can expect to purchase a reliable four-door sedan in good condition. You could, of course, use this $15,000 and get another $10,000 in financing to buy a new vehicle.
Assuming a 5% interest rate over a 48-month repayment schedule, you will be on the hook for monthly payments of $230. If you were to invest these monies over the next four years in the stock market using dollar-cost averaging, you will be in the position of gaining money over the next four years (instead of devoting these funds toward repaying your debt obligations).
Experimenting with TipRanks’ dollar-cost average calculator can help you understand how different investment values, timeframes, and company shares will allow you to create value over time.
Conclusion: Making the Right Decision for You
There is no one right decision regarding your personal finances. When making spending choices, it is important to consider both your needs and your economic circumstances. Purchasing a reliable, used car could allow you to meet your transportation requirements, while saving money along the way.
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