Buying a car in Canada: New versus used

By: Miranda Marquit on May 23, 2016
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Every few years, you likely find yourself looking to buy a car. Deciding whether to buy a new or used car can be a tough choice.

At first glance, it might seem as though it makes more sense to purchase a used car since these cars often come with lower prices. But are there circumstances when it makes more financial sense to buy a newer car?

There are a lot of moving parts when it comes to buying a car. Here are some things to keep in mind:

Buying a new car

When you buy a new car, you are likely to pay more up front. Not only that, but they depreciate as you drive them off the lot. That means that you pay more, and take a hit in terms of the car’s value almost immediately. If you think you will sell your car down the road, or trade it in, that depreciation can be hard to swallow.

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On the other hand, buying a new car means that you are likely to spend less on maintenance and repairs. It’s important to take care of your car, no matter its age. A newer car usually requires only regular maintenance and upkeep. Unless you get in a car accident, there is a small chance that you will need major repairs on your new car. Plus, if you do end up needing major repairs, your car’s warranty will probably cover the costs.

It’s important to weigh the high cost of buying a new car against the savings you will see in maintenance and repairs. On top of that, it’s hard to beat the peace of mind that comes with buying a new car. You don’t have to worry as much about a new car breaking down on the side of the road.

Buying a used car

The biggest advantage to buying a used car is the fact that it probably costs much less than buying a new car. Instead of spending more than $15,000 on a new car, you can usually find a reasonably reliable used car for between $5,000 and $12,000. In some cases, it’s even possible to buy a used car in Canada for even less.

It’s easier to save up for a used car and pay for it in cash than it is to do the same thing with a new car. You might not even need a loan to buy a used car. This can mean big savings over time. When you buy a higher-priced car, you naturally expect to borrow, and that means you pay interest as well as a higher price.

If you need to finance a used car, though, buying new or used doesn’t seem as cut and dry. First of all, many new cars come with special financing options from dealers. You can get a great deal on a car loan in some cases – including 0% financing for a set period of time. Because of dealer incentives, it’s possible that the interest rate you pay on a used car loan is higher than the rate paid on a new car. If you buy a new car for $18,000, you might be able to see an interest rate of 3.35%. On the other hand, getting a loan for a used car that costs $10,000 might come with an interest rate of 6.95%.

If you get a five-year loan for each, the new car comes with a payment of $326 and total interest of $1,575 for the life of the loan. The used car comes with a monthly payment of $198, but your total interest paid will be $1,867 over five years. In this scenario, the used car is more expensive in terms of interest. You need to make sure you pay off the loan faster if you want to avoid paying more in interest.

A used car might also come with higher maintenance and repair costs, and the warranty could be expired. You run the risk of paying more to take care of the used car. Buying a used car might still be worth it if you can pay for the car with cash and it is known for its reliability.

What about car insurance costs?

Insurance is another consideration when buying a car in Canada and deciding between a new or used car. Insurance costs vary according to a variety of factors. In most cases, you are going to pay a higher cost to insure a new car than you will to insure a used car. In many cases, your used car only needs collision coverage. However, a new car probably needs a more comprehensive plan. And don’t forget that a more expensive car needs more coverage – and that means a costlier policy.

While there are some cases in which used cars are more expensive to insure (as when it’s a model that is more likely to be stolen), you are likely to spend less on auto insurance if you buy a used car.

Compromise: buying a lease return or late-model used car

You don’t need to buy a car that is really old to get the benefits of buying a used car. One of the best ways to compromise is to buy a late-model used car. If you can buy a car that is two or three years old, you can get the best of best worlds. You end up with a newer car that probably still has part of its warranty still intact, and one that has already seen its biggest drop in depreciation.

While a car like this still costs more than an older used car, it has some of the perks that come with buying new. If you purchase a lease return, you might have access to special financing deals, and you have the advantage of a car that costs less to maintain, and has a low chance of needing major repairs in your first few years of ownership. However, you get these benefits without paying the new car sticker price.

Deciding whether to buy new or used is a big decision. Careful weigh the costs, your preferred lifestyle, and the importance you attach to peace of mind. Make your choice based on what works best for your life as well as what works best for your pocketbook.