New vs. used? Choosing the right vehicle for your budget

Getting a new set of wheels? It can be hard to choose between buying a new car versus a used car. But from a lender’s standpoint, either is a good bet.

First, there are plenty of used vehicles out there that are just as reliable as new. These days, it’s not unheard of for a car to rack up 100,000 miles without needing major repairs. So if you find a make and model with a good track record of reliability, you’ll have a vehicle that lasts for years, as long as you do preventive maintenance.

The question of choosing a new vehicle versus a used one comes down to many factors. In the following, we'll walk through the pros and cons of buying a new vehicle versus a used one. We'll also go over a few things to consider to make sure you're bringing home something you can afford.

New vehicle or used? The pros and cons

New car: What are the advantages?

- Vehicle has no history, which brings peace of mind.
- Comes with a warranty and up-to-date safety features.
- Dealerships can offer highly competitive rates for new cars (if you have good credit).
- The new car smell!

New car: What are the downsides?

- Depreciates as soon as you drive it off the lot.
- Scheduling oil changes and repairs with the dealership to maintain the warranty.
- Higher costs of insurance and vehicle taxes. (But those costs are also influenced by where you live.)

Used car: What are the advantages?

- More options than ever to get a “like new” car that meets your budget.
- Obtaining a full history is now easier than ever, making it less of a risk.
- Depreciates more slowly, making you less likely to be upside down on payments.
- Lenders can offer a variety of terms, providing more flexibility for your budget.

Used car: What are the downsides?

- Higher out-of-pocket costs to cover repairs and routine maintenance due to lack of warranty. (However, some dealerships offer warranties on certain used vehicles.)
- To offset the lower sticker prices, the interest rate on used vehicles can be somewhat higher than new.
- Your search for a specific make and model with the gotta-have-it features and maximum desired mileage can take longer and be more extensive.

Questions to ask before choosing a car

While you're weighing getting a new vehicle or one that’s previously owned, it’s important to factor in your budget and your driving habits.

How much car can you afford?

The most important factor in your car-purchasing decision is knowing how much payment your budget can take on. A great place to start is with Minnwest Bank’s online calculator, How Much Car Can I Afford?

All you do is plug in a monthly payment your budget can afford, and it computes the maximum loan you can take out.

Pro tip: Run different scenarios through the calculator, including different interest rates, loan terms and payment amounts. This will help you find the car price that hits the sweet spot in your budget.

How long do you plan to keep the vehicle?

A new vehicle loses value as soon as you drive off the lot, then anywhere from 15-20% a year in the first five years. This means if you spend $32,000 on a new car and trade it in five years later, you’ll lose anywhere from $14,000 to $23,000 to depreciation. However, if your aim is to drive it for years beyond that, and you're less concerned about the resale value, then depreciation will be a minor consideration.

How much will you drive the car?

Driving habits and the wear and tear they will take on your vehicle are key considerations. Heavy mileage, say 20,000 miles a year or more, means your fuel and routine maintenance, such as oil changes, will be a major expense. A newer model with a markedly higher fuel efficiency may be an advantage. So can the warranties that come with newer vehicles.

Can you maintain an emergency fund?

Ideally, all car owners can keep enough cash on hand to cover the myriad expenses that come with having a car, including oil changes, new tires, and a brake job.

Aim for a savings fund of $1,500 or so. This can help you comfortably handle the routine maintenance and prepare you for major repairs, and cover your insurance deductible.