Buying a new or used car is a debatable decision for every family. Maybe your family will fall in love with a new car for its gorgeous looks, or they will compare their future car with a neighbour. After home, buying a car is one of the important decisions of personal finance. Therefore, before buying a car, think about it financially, not emotionally.
Recent unprecedented cost of living hikes force everyone to withdraw savings. Don’t be one of them; rather, become a calculating person by analyzing the cash benefits of both cars.
If you want to be frugal about car buying or get rid of financial stress, this article will guide you in deciding on a new or used car. Let’s start with the following:
Key takeaways:
- You can’t avoid sales tax until you live in a tax-free state, but there are some legal procedures to minimize car tax.
- A new car depreciates up to 20% within the first year of use. That means used cars lost value gradually compared to new cars.
- If you love new features, choose a new car, but buying a used car can save you from inflation.
- Used car is good for long-term use & new car is better for short-term.
- Buying a car is an expense, not an investment. So, before buying any car, first, compare the cash benefits of each one.
Should I buy a new or used car?
Used car. A used car has low maintenance costs & depreciates slowly. It is cost-effective for rough use, occasional use or if you want a secondary vehicle. A used car is the best for cash benefits & durability, whereas a new car is good for the lucrative look with new technology.
For example, a new car could be more suitable for daily commuting. So, based on individual financial situation & need, both cars could be a good choice.
But buying a car is one of the crucial decisions of family finance & we often need clarification to select the right one. When I was served as a financial planner, every client asked me why I should not buy a new car.
Buying a new car can establish our prestige in society & every trending feature is only available in a brand-new car.
Let’s understand it financially. For better understanding, I have analyzed a new car, used car (maximum three years old) & cheap car (more than three years old)
Should I buy a new car?
No, you should not buy a new car because it gives you fewer financial benefits for the long term. Buying a car is a significant monetary decision because you have to analyze many factors to find financial benefits.
Say John is considering to buy a car worth $50,000. For this, John needs to analyze the cost of car insurance, what would be car tax sales, car maintenance expenses, & car depreciation rate per year. In both cases, a used car gives you more cash benefits than a new car.
Now you may be interested to know details about these four costs, i.e., insurance, maintenance, tax & depreciation. Below, I have analyzed the details that will help you to buy the right car.
How much is car insurance cost in the USA?
Car insurance cost in the USA is at least 1.2% to a maximum of 5.2% of the original car price. Car insurance costs could vary based on factors such as annual mileage, states, car type, driving history, & inflation. Therefore, it is difficult to say the exact car insurance cost.
For example, car insurance costs in the USA increased by 14% due to recent inflation. That means the previous $1772 worth of insurance policy would be $2020.08 now.
The table below shows the updated car insurance cost in the USA:
| Type | Percentage (Range) | Annual insurance cost (range) |
| Used Car | 1.7% to 3.8% | $850 to $1900 |
| New Car | 2.1% to 5.2% | $1050 to $2,600 |
| Cheap Car | 1.2% to 2.60% | $600 to $1,300 |
Now, you may think about how much would be tax for my car. Isn’t it?
How much is the car tax for my car?
You have to pay 0% to 13% car tax based on state, location whether you belong to city or countryside of USA.
For example, you have to pay zero car tax in Alaska, but car tax could be a maximum of 13% in California.
Below, the table has given an estimated tax cost idea for the USA; the second table provides tax cost for California states, the best car-selling region in the US.
| Type | Percentage (Range) | Sales tax (range) |
| Used Car | 4.2% to 11% | $2100 to $5,500 |
| New Car | 5.1% to 13% | $2,550 to $6,500 |
| Cheap Car | 4.1% to 11.2% | $2,050 to $5,600 |
| Type | Percentage (Range) | Sales tax (range) |
| Used Car | 7.41% to 11% | $3,705 to $5,500 |
| New Car | 7.41% to 13% | $3,705 to $6,500 |
| Cheap Car | 7.41% to 11% | $3,705 to $5,500 |
Sales tax is almost the same for all types of cars except new cars. On average, new car shows 2% extra, which could be a financial burden in this inflation era. If you come here by reading the above article patiently, your next question should be about car maintenance costs per year.
Cost of vehicle maintenance?
Vehicle maintenance costs a minimum of $550 to a maximum of $1050 with unexpected repair costs. The cost could vary depending on bad economic conditions, car type, & quality of maintenance.
The table below shows how much you have to pay for each car maintenance component:
| Elements | Used Car | New Car | Cheap Car |
| Oil | $25 to $110 (based on warranty) | $25 to $110 (based on warranty) | $25 to $110 |
| Tire rotation | $25 to $55 (based on warranty) | $25 to $55 (based on warranty) | $25 to $55 |
| Brake pad change | $100 to $310 (based on warranty) | $100 to $310 (based on warranty) | $100 to $310 per axle |
| Air filter | $12 to $35 (based on warranty) | $12 to $35 (based on warranty) | $12 to $35 |
| Battery change | $100 to $220 (based on warranty) | $100 to $220 (based on warranty) | $100 to $220 |
| Tune-up | $155 – $410 | $105 – $255 | $110 – $305 |
| Transmission fluid change | $155 – $410 | $105 – $255 | $110 – $305 |
| Coolant flush | $78 – $205 | $50 – $130 | $50 – $155 |
| Brake fluid flush | $78 – $205 | $50 – $130 | $50 – $155 |
| Wiper blade replacement | $12 – $32 (per blade) | $12 – $32 (per blade) | $12 – $32 (per blade) |
| Light bulb replacement | $7 – $17 (per bulb) | $7 – $17 (per bulb) | $7 – $17 (per bulb) |
| Annual Maintenance | Cover under warranty | Cover under warranty | Varies |
Want to learn something new today, i.e., what factors mostly reduce car value after use? The next question may surprise you: Are you ready?
What is the depreciation model of a car?
The depreciation model of a car compares depreciated value after a certain period of use for different types of cars. This model helps to understand future car value as well as helps to make proper financial decisions to buy the right car.
Let’s understand it from the model,
The model dictates that the new car’s depreciated value is 46.818% ($23,409÷$50,000), which means you have lost your new car’s 53.818% (100%-46.818%) value over five years. It is also suggested that a new car loses value faster from the first day of use, which doesn’t make sense for long-term cash benefits.
Then, the used car’s depreciated value is 58.27464%, which suggests the car has already lost significant value during buying time. So, updated technology doesn’t increase used car depreciation; rather, it keeps a stable value.
Last, after five years, a cheap car lost its maximum value (depreciated value=34.68%). It means the car has already depreciated to the highest level & model needs to be updated.
In the bottom part, you will see some factors liable for car depreciation. Among these factors, mileage, age, car condition, & fuel efficiency significantly increase the car depreciation rate.
You Need help understanding clearly; let’s understand it mathematically.
Calculating depreciation on a car?
You can calculate car depreciation by applying double decline methods. The car doesn’t depreciate evenly. Its depreciation starts with a higher value and then sequentially becomes slower. That means the car doesn’t depreciate in a straight line but follows double declining depreciation.
Car depreciation has many reasons, such as mileage, technology, use & market conditions. Based on car type, you will lose uneven cash benefits after use.
| Year | Rate (%) | Depreciation ($) | Cumulative Depreciation ($) | Book value= Original value – Cumulative Depreciation ($) |
| 1 | 20 | 10,000 | 10,000 | 40,000 |
| 2 | 15 | 6,000 | 16,000 | 34,000 |
| 3 | 15 | 5,100 | 21,100 | 28,900 |
| 4 | 10 | 2,890 | 23,990 | 26,010 |
| 5 | 10 | 2,601 | 26,591 | 23,409 |
| Year | Rate (%) | Depreciation ($) | Cumulative Depreciation ($) | Book value= Original value – Cumulative Depreciation ($) |
| 1 | 15 | 7,500 | 7,500 | 42,500 |
| 2 | 10 | 4,250 | 11,750 | 38,250 |
| 3 | 10 | 3,825 | 15,575 | 34,425 |
| 4 | 8 | 2,754 | 18,329 | 31,671 |
| 5 | 8 | 2,533.68 | 20,862.68 | 29,137.32 |
| Year | Rate (%) | Depreciation ($) | Cumulative Depreciation ($) | Book value= Original value – Cumulative Depreciation ($) |
| 1 | 25 | 12,500 | 12,500 | 37,500 |
| 2 | 20 | 7,500 | 20,000 | 30,000 |
| 3 | 20 | 6,000 | 26,000 | 24,000 |
| 4 | 15 | 3,600 | 29,600 | 20,400 |
| 5 | 15 | 3,060 | 32,660 | 17,340 |
The depreciation table indicates that a used car has more book value after five years, suggesting it depreciates slowly compared to others. Then the book value of the new car is $23,409, which is ($23,409 – $17,340) $6,069 higher than a cheap car. That means buying a new car is more cost-effective than a cheap car.
In this phase, you perhaps understand that car buying is a comparative financial decision between a new car & used car.
But You may also think about how to compare the financial benefits between a new car & used car. The following question will clear your every doubt about car buying.
Buying new versus used car?
Deciding between a new car and a used car could vary based on the individual financial situation & needs. But, as a finance professional, I suggest first considering affordability and then others.
The table below helps you to compare a new car & used car.
| Financial benefits | Used car | New car |
| Warranty | No warranty unless certified pre-owned | Yes |
| Insurance cost | Less | High |
| Technology | common | Latest |
| Opportunity Cost | Financial flexibility to meet other needs | Fund shortage due to faster depreciation |
| Car history | Could have prior accidents or wear history | No chance of previous accidents or wear history |
| Fuel Efficiency | Not better than a new car. Could be varied based on model & age | Better than used car |
| Maintenance expense | Higher | Lower |
| Budget | Under budget | Could go beyond budget |
| Feature | Common with affordable price | Advance with extra premium or money. |
| Ownership cost | Higher | Lower |
| Financing cost | Maximum 5.34% or Higher than new car | Maximum 4.81% or lower than used car |
| Initial price | Lower than a new car | Higher than a used car |
| Instant depreciation | Slower | Faster |
| Stress | Less worry for wear and tear | More worry for wear and tear |
Now, this is decision time:
- If you love affordability with durable features, a used car will be more cost-effective in the long run.
- If you like trending features and plan to lease or sell after a few years of use, buying a new car would be the right decision.
In this phase, you may still think each car has its unique advantage. So, why one should never buy a new car? Let’s understand it mathematically.
Never buy a new car?
You should never buy a new car to save your cash. Whether you are a Middle-class American or a millionaire, as a finance expert, I would advise you not to sacrifice your savings. If you do, that will be the worst financial decision you have ever made.
Let’s consider a car loan payments scenario; Charlotte wants to buy a car with the same make & model. She has two options in front of her with a 5% interest rate for five years.
1. Buying a new car worth $50,000
2. Buying a used car worth $28,000
- Calculating car loan payment for new car
- Calculating car loan payments for used car:
A used car’s value is 56% lower in America than a new car.
- Financial comparison:
Total loan payment after 5 years (new car)
=monthly loan installment ×number of months
=$927×60
=$55,620
Total loan payment after 5 years (used car)
=monthly loan installment ×number of months
=$519×60
=$31,140
So, at maturity, you have to pay $24,480 ($55,620-$31,140) more for a new car, which could be a huge savings.
Concluding Thought
Buying a new or used car is a matter of personal choice & preference. If you have no financial insolvency, love advanced technology & look, a new car is a good fit for you.
However, the Pandemic & present bad economic situation drastically change our living standards. Inflation hits commodity items to luxury goods & most people lose savings to meet family needs.
If you are one of them, buying a used car would be a logical decision to increase your family savings. This savings helps you to maintain family solvency & upgrade living standards.
FAQ (Frequently Asked Questions)
How much is the gift tax on a car?
How much is the gift tax on a car?
18% to 40%. Per year, you can gift up to $17,000 worth of a car without giving any tax. For a single, married couple, i.e., husband & wife, gift tax exemption on a car is $34,000 ($17,000×2). According to recent data, a US citizen is eligible for a $12.92 million gift tax exemption in their lifetime.
For instance, for a $50,000 car, you must fill up a gift tax return file for $33,000 ($50,000-$17,000) but don’t need to pay any tax. You will only pay gift tax on the car when your gift value exceeds $12.92 million.
How to avoid paying sales tax on a used car?
There is no legal way to avoid sales tax on used cars, but you can minimize your sales tax on cars by following some methods. If you live in a tax-free state such as Alaska, Delaware, Montana, New Hampshire, and Oregon, you will get a 100% tax waiver for your used car. If you buy your car from a gift or Inheritance, private seller, auction or exchange your car in Trade value, you can minimize your car tax.
Each method has drawbacks, but if you want to buy another used car by exchanging your car, Trade value will significantly lower the sales tax on used cars. Therefore, Trade-in value is the best way to minimize sales tax on used cars.
Consider a scenario: Henry lives in California & wants to buy a used car worth $50,000 by exchanging his car, whose value is $12,000.
Used car price=$50,000
Trade in value=$12,000
Car sales tax in California=11% (maximum)
Now,
Sales Taxable Amount = Purchase Price – Trade-In Value
= $50,000 – $12,000 = $38,000
So, Sales Tax Amount = Sales Taxable Amount × Sales Tax Rate
= $38,000 × 0.11 = $4,180
Sales tax without Trade in value=$50,000×0.11
=$5,500
Sales tax difference=$5,500-$4,180
=$13,20
So, you can save $13,20 in sales tax on used cars by applying trade-in-value methods.
Disclaimer
The information provided in this article is just the author’s view & only for educational purposes. By reading this, you agree that the information is not car buying advice. Do your research before buying car. Therefore, FinanceIdeas.org will not be liable for your financial loss.
