Used Cars vs. New Cars

Should you go in for used cars? Or buy a new one straightaway? That is one of the fundamental 'car decisions' you'll need to make, when you move to America.

At first, this might seem a trivial question. New cars are always better, right? They look good, they're the latest models, they are less likely to suffer mechanical problems. But the used car market in America is so mature, and the reliability record of such cars so decent, you'll be seriously remiss in not considering a pre-owned car. In fact, if you choose one carefully, nothing can beat a pre-owned car on total cost of ownership.

Here's why.

The Glories of a Used Car

1. A used car is cheaper than a new one. Simple.

   This enables you to buy a bigger, better car, even a more luxurious brand, within the same budget. For instance, you could get a 3 year old Mercedes Benz for the same price as a new Toyota Avalon.

2. A car, unlike real estate, is a depreciating asset. And the rate of depreciation is highest in the first 3 years. It is often said a new car loses upto 30% of its value moments after you drive it out the showroom. Why? Because everyone loves to drive a brand new car, not one that's got even a little dirt on its tires.

   You will therefore not just spend more, but also lose the most value (money) by buying a new car. A pre-owned car depreciates at a much much lower rate, and maintains its value well.

3. Options and add-on features (e.g. a moonroof or a 6-CD changer) lose value much faster than the basic car itself. When you buy a used car, therefore, you can get a 'loaded' car for a much better price relative to a new car with the same options.


4. If you are new to the US and you (or members of your family) have just learnt driving, you might feel more comfortable handling a used car. For even if you dent or scratch it somewhere, it won't lose value as much as a new car (and won't bother you that much, psychologically!)


5. Many states in the US charge a personal property tax on vehicles. The tax on used cars is much lesser than the rate on new cars.


6. Insurance premiums on pre-owned cars are lower than on new cars.


7. License and registration fees and sales taxes are lower on pre-owned cars compared to new cars.


8. One of the biggest reasons buyers shy away from a used car is the risk associated with such a car. You don't know who the previous owner was. You don't know how the car was treated. And hence the apprehension of getting stuck with a 'lemon'. While these risks are real, they have been significantly mitigated in the American market.
   • There are companies (the biggest one being Carfax) that keep track of vehicle histories using their VIN numbers as unique identifiers. A Carfax report can tell you whether the car ever had an accident, made an insurance claim, had its odometer reset and so on. While this doesn't guarantee reliability, it does reduce risk of buying the car.
   • Most new car dealerships also keep an inventory of pre-owned cars. These are usually cars that are returned after a 2 to 4 year lease. In other words, you can purchase a pre-owned car from a dealership, much like you would purchase a new car. You don't have to spend hours searching the classifieds or talking to a private owner whose antecedents may be suspect. A dealership is worried about its reputation and chances of them selling you a 'lemon' are negligible (of course their selling price would be slightly higher than if you were to buy directly from a private owner)
   • If you are worried about reliability of a pre-owned car, you can separately purchase extended warranties. Most manufacturers now offer warranties that cover a used car for a longer period and more miles than what is typically offered on a new car. Sometimes dealers offer their own extended warranties (though it is better to go with the manufacturer's extended warranty program).
   • Many dealers and manufacturers conduct rigorous multi-point inspections on used cars before offering them for re-sale. Such cars are called certified, pre-owned cars (CPO cars). The risks associated with breakdown or mechanical problems are further reduced with CPOs, but their price goes up accordingly.


9. And finally, another risk associated with a used car is it price. How do you know what's the right price for a certain make and model? Can someone hard-sell you into a price that's too high?

   Once again, the maket is mature and prices for every year's model are fairly well known. Check out sites like:

   They will provide you enough estimations for you not to go wrong on this.

Net net, there are a variety of ways in which you can reduce the risks associated with a pre-owned car and yet take advantage of the lower ownership costs associated with it. It is upto you to find the right balance between price and risk that works for you.

The Excitement of a New Car

1. The greatest joy of a new car is psychological. The new car's smell, look, feel, acceleration is something that cannot be beaten. And since a car is usually a statement of personality, why compromise?


2. Compared to many other countries, the selling price of most car models are the lowest in America. That's because the US is the world's bigger car market (therefore, economies of scale for manufacturers) and the most competitive (therefore, the most incentives and price-cuts to consumers). If you really want to buy a new car, no place better than America.


3. If you buy a used car that's say one year old, and you add in the cost of certified inspections, the price of the car would almost equal that of a new car. A pre-owned car gives you tangible price savings only when its 3 or more years old. But that means settling for an older model. Since model interiors, exteriors and features change fairly frequently in the US, you might not, therefore, get the looks or features you want, compared to a brand new car.


4. While pre-owned cars come with extended warranties, these won't usually cover things of normal wear and tear, like tires, batteries, wipers, or rubber parts. A new car would not face the need for such replacements, at least for 3-4 years.


5. New cars often come with free maintenance checks and free service during the warranty period. No such luck with used cars - you'll have to pay for servicing and oil changes every time.


6. New cars have better reliability records. Even if used cars are covered by extended warranties, just the effort of taking time off and going to the dealership to get your car fixed is a pain. With a new car, you would have fewer such episodes, on an average.


7. New cars incorporate the latest safety features and technology, and hence have better safety records, on an average.


8. You have better financing options on new cars. For example, leases are not easy to come by on pre-owned cars. No such issues with a new car, where you can either lease or buy (in fact, some of the leasing deals are really attractive and are aggressively advertised).


9. Banks generally offer slightly lower interest rates on a new car loan, compared to a used car loan. This reflects the lower risk involved in new car loan repayment - in turn deriving from its higher salvage value at the end of the loan term.

So what's the bottomline?

Well, it depends strictly on your personal preference. If you do go in for a pre-owned car, I would recommend one that is certified, purchased from a car dealership and at least 3 years old. This would be more expensive compared to buying from a private owner directly (searching newspaper classifieds or online sites like www.craigslist.org). But it would minimize risks while maximizing value for money.

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