Why should you buy a new car instead of a used one with low mileage?

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Question: 

What are the best reasons one should buy a new car instead of a used one with low mileage and an in tact warranty. I ask, because my wife wants to purchase a new car, while I would prefer to purchase a slightly used car at a lower price. (letting someone else take the depreciation hit)

Answer: 

There are many things to consider in making the choice between purchasing a new or used car, including a comparison of sticker prices.  As you suggest, new car values depreciate significantly in the first few months of ownership, often dropping thousands of dollars as the car is “driven off of the showroom floor.”  But it is important to recognize that at least part of this big drop in value between new and almost-new used cars is due to a phenomenon that economists call the “lemons” problem.

A car becomes available for sale in the used car market because the original owner didn’t want it anymore.  There could be many reasons for this:  Maybe the original owner’s circumstances have changed requiring, for example, a bigger car to accommodate a growing family.  Maybe the original owner simply decided to upgrade to the latest, most up-to-date car model as a matter of personal preference.  Or maybe the original owner decided to get rid of the car because of its many problems requiring frequent, costly repairs; that is, maybe the car is a “lemon.”  That possibility, while it does not mean that every used car will be a lemon, does make it more likely that a lemon will find its way into the used car market than a reliable car.  Consequently, there is a greater than normal likelihood that a used car, chosen at random among all used cars, will be a lemon.  From your prospective as a potential used car buyer, none of this would be a problem if you were able to identify and avoid the lemons on used car lots.  But a used car buyer typically does not have the same intimate knowledge of a car’s history as does the original owner.  We say that information is “asymmetric” between buyer and seller.  And this asymmetry of information, leading to a greater risk of unwittingly buying a lemon in the used car market, makes people willing to pay substantially less for almost-new used cars than for new cars.

Of course there are ways to mitigate your risk of getting stuck with a lemon when you shop for a used car.  As you mention, if there is an unexpired portion of the manufacturer warranty that will transfer to the buyer, this can reduce your cost if you do buy a lemon.  Other used-car buying strategies are designed to reduce the asymmetry of information.  Having the used car inspected by a qualified mechanic before purchase, or obtaining a detailed car history from firms such as Carfax or Autocheck are examples of such strategies.  No matter what you do, however, you’re not likely to be able to acquire the detailed knowledge about the car’s reliability that the original owner possessed, and this asymmetry of information leaves you vulnerable to some lemon risk, making many seemingly “good deals” on used cars somewhat less good than they might appear.

Beyond the difference in sticker prices, there are other factors to consider in deciding between purchasing a new or used car.  Cars are generally less expensive to maintain during the first few years.  If you buy a used car, you may be taking ownership just as components are about to reach the end of their serviceable life and require replacement.  Furthermore, automobile technology is advancing pretty rapidly, so a new car might have significantly better fuel efficiency, or improved safety features, compared to a three- or four-year-old car of the same model.  If you plan to borrow money to buy the car, you’ll likely find lower interest rates available on new car loans than on used car loans.  Often this is due to dealer incentives in the form of discounted financing offered only for new car purchases.  Other dealer incentives that are generally available only to new car buyers might take the form of free scheduled maintenance for the first year or so, or rebates on the sticker price.  Finally, insurance rates can also differ depending on the age of the car but, in this case, the comparison could tilt either way.  New cars have higher value and so are normally more expensive to insure.  But a new car with the latest safety features might qualify for insurance rate discounts not offered on older cars without these features.

Last updated on February 2, 2017