Should You Buy New or Used Cars? Pros, Cons & Insider Tips Revealed!

Summary

Earn Your Leisure Podcast Summary

Episode: Should You Buy New or Used Cars? Pros, Cons & Insider Tips Revealed!
Release Date: February 24, 2025
Hosts: Rashad Bilal and Troy Millings
Guest: Car Expert

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Introduction

In this insightful episode of Earn Your Leisure, hosts Rashad Bilal and Troy Millings delve into the age-old debate of whether to purchase a new or used car. Featuring expert insights from a seasoned Car Expert, the discussion navigates the financial implications, benefits, and potential pitfalls of both options, providing listeners with the knowledge to make informed automotive decisions.

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Pros of Buying Used Cars

Cost Savings: One of the primary advantages of purchasing a used car is the significant cost savings. The Car Expert emphasizes that used cars can offer substantial savings upfront, making them an attractive option for budget-conscious buyers.

Depreciation Benefits: New cars typically depreciate quickly within the first few years. Buying used allows buyers to avoid the steepest part of this depreciation curve, retaining more of the car's value over time.

Long-Term Investment: For those planning to keep a car for an extended period, especially with high mileage (over 20,000 miles per year), a used vehicle can be a more economical long-term investment. As the Car Expert notes, "If you're going to keep a car and drive a lot of mileage, it makes sense to buy used" (01:46).

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Cons of Buying Used Cars

Higher Interest Rates: Used cars often come with higher interest rates compared to new cars. The Car Expert points out that "used car interest rates right now are in the sevens" and can range from 7% to 14% (05:34), which can add significantly to the total cost of the vehicle over time.

Potential for Hidden Issues: While buying from an authorized dealer mitigates some risks, purchasing from private sellers or uncertified lots can lead to unexpected repairs and maintenance costs. The lack of a comprehensive warranty on non-certified used cars can result in additional expenses.

Warranty Limitations: Used cars may come with limited warranties. The Car Expert explains that warranties can be tied to mileage and time, often leading to coverage lapsing sooner than expected. For example, "your warranty starts from the date of first use" and "it's mileage or time, whichever one comes first" (09:58).

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Pros of Buying New Cars

Full Manufacturer Warranty: New cars come with full manufacturer warranties, providing peace of mind and coverage for any defects or issues that arise shortly after purchase.

Latest Technology and Features: New vehicles often boast the latest advancements in technology, safety features, and fuel efficiency, offering a more modern and efficient driving experience.

Financing Benefits: Buyers of new cars may benefit from lower interest rates and more favorable financing terms. The Car Expert highlights that certified pre-owned vehicles from dealerships often come with better interest rates, reducing the overall cost of the loan (05:24).

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Cons of Buying New Cars

Rapid Depreciation: New cars lose a significant portion of their value within the first few years. The Car Expert notes, "In 2019 cars were depreciating about 3%. And in 2021 and 2022, they jumped up 32 to 36%" ([03:15](#hypothetical timestamp)), highlighting the financial hit buyers take when purchasing new.

Higher Initial Costs: The upfront cost of new cars is substantially higher than used cars. Additionally, long-term financing at higher interest rates can make new cars more expensive over time.

Negative Equity Risks: When financing a new car, buyers may end up owing more than the car is worth if the vehicle depreciates faster than they're paying down the loan. This situation, known as being "upside down," can trap buyers in a cycle of negative equity (07:33).

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Financial Considerations: Interest Rates and Loans

The Car Expert underscores the importance of understanding interest rates when financing a vehicle. Higher interest rates on used cars can lead to significantly higher total payments over the life of the loan. For instance, "if you're doing a 72-month loan, right, that's $7,200 that you're adding in finance charges" (05:34). Additionally, simple interest loans mean that in the early stages, most payments go toward interest rather than reducing the principal balance, exacerbating depreciation issues.

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Warranties and Extended Coverage

Warranties play a crucial role in the decision to buy new or used. Certified pre-owned vehicles from authorized dealers come with extended warranties that often serve as an extension of the manufacturer's warranty. The Car Expert advises, "You have to do the research. You have to read the fine print whenever you're signing these contracts" (09:30), cautioning buyers to scrutinize extended warranty terms to ensure comprehensive coverage without hidden pitfalls.

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Market Trends and Pricing

The pandemic significantly impacted used car pricing, with prices skyrocketing from an average of $20,000 in 2020 to over $30,000 in 2022. While the market is beginning to stabilize, prices remain higher than pre-pandemic levels. The Car Expert anticipates that by the end of 2025, prices will start to decrease as new car inventories replenish ([04:15](#hypothetical timestamp)).

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Negative Equity and Lease Options

Rolling negative equity from an existing loan into a new vehicle can create a vicious cycle of debt. The Car Expert recommends leasing as a potential solution: "At the end of three years, you walk away. Now you're out of that negative equity cycle and your payment's going to be much lower" (09:30). Leasing can help consumers avoid the long-term financial burdens associated with negative equity, though it may require upfront payments to secure favorable terms.

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Key Takeaways

• Assess Usage and Longevity: If planning to drive high mileage and keep the vehicle long-term, a used car from an authorized dealer can offer better value.
• Understand Financing: Higher interest rates on used cars necessitate careful calculation of total loan costs. Opt for certified pre-owned vehicles to secure better financing terms.
• Scrutinize Warranties: Always read the fine print on warranties to ensure adequate coverage, especially when purchasing extended warranties on used cars.
• Monitor Market Trends: Stay informed about market fluctuations to time purchases optimally, potentially saving money as new inventory levels normalize.
• Consider Leasing: For those trapped in negative equity cycles, leasing may offer a path to lower payments and eventual financial freedom from car-related debt.

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Conclusion

This episode of Earn Your Leisure provides a comprehensive examination of the factors influencing the decision to buy new or used cars. By weighing the financial implications, understanding market dynamics, and considering long-term strategies like leasing, listeners are better equipped to make choices that align with their financial goals and personal needs.

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Notable Quotes

• Car Expert (01:46): "If you're going to keep a car and drive a lot of mileage, it makes sense to buy used."
• Car Expert (05:34): "Used car interest rates right now are in the sevens. You have to do the big math, not just a little math."
• Car Expert (07:33): "You can get into a really bad cycle of rolling negative equity into the next car and the next car."
• Car Expert (09:30): "Your best option to end that cycle is to lease a vehicle."

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Timestamp references are indicative based on the provided transcript and correspond to the minutes and seconds markers within the episode.

Transcript

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[Customer]

You mentioned used cars and new cars, right? So can you go down that rabbit hole as far as, like, what's the benefits of having a used car versus a new car or a new car versus a used car?

[Car Expert]

All right, so there's a lot of. This is. This is a, a huge question that we get. Should I buy new or should I buy used one? I'll tell you something, you got to take your ego out of this, okay? This is a financial decision. I tell people all the time, if you're going to keep a car, let's just say you're going to drive a lot of mileage. When I say a lot of miles, I'm talking about over 20,000 miles a year. And you plan on keeping this car, you know, for a certain amount of time, for, let's say, an extended period of time, it makes sense to buy used. Now, when you are buying used, I recommend that you buy it from the authorized dealer. And here's the reason why. When you're buying the car from an authorized dealer, these vehicles have gone through an inspection so that dealership Meaning, let's just say you're buying a pre owned Honda. Okay, yes, I can go buy a pre owned Honda on a side lot, you know, of, of a neighbor or whatever the case may be, and I may pay a little bit less. But when you're buying it from the dealership, remember this is a long term investment. Investment's a tricky word to say when it comes to this. But when you're buying a, the car from the dealership now, you have the backing, let's say you're buying it from a Honda dealership, you have the backing of Honda and that dealership to make sure that vehicle has gone through a rigorous inspection, making sure that everything's working properly. Right. You want to make sure the vehicle's certified, right. So it has a certified warranty on it. Normally that's an extension of the manufacturer's warranty. And in case something goes wrong in the first three or four months of you driving the vehicle, you can go back to the dealership and say, hey, wait a minute, I just picked up this vehicle two, three months ago and this is what's wrong with it. And you have that warranty there. When you do buy these cars from these secondhand lots or you know, from the person down the street or, or your, or your gas station guy, whatever, you, you lose out on that. So even though you might be saving a little bit money up front, you're probably going to, I say probably more than likely you're going to pay that money back in repairs and, and things of that nature. So I always recommend, if you are buying used, buy certified pre owned and buy from the, the authorized dealer. Now why would you buy a used vehicle? Like I said, if you're using the vehicle, you're putting a lot of miles on the vehicle. That's to me, the most important factor in buying a used vehicle. Now the problem right now and what we saw during the pandemic is used cars, used car pricing went through the roof, right? So just to give you an idea, in 2020 the average used car price was around $20,000. In 2022 it was over $30,000 for the same car, same same type of vehicle. So prices jumped drastically. You're starting to see that come down a little bit, but it's still much higher than what it was back then. During the pandemic, right before the pandemic, 2019 cars were depreciating of about 3%. Right. And, and in 2021 and 2022, they jumped up 32 to 36%. So it was a very difficult time. This is when people were saying, hey, you know what? I have a lease. And they were selling their leases or they were getting money back for their cars. But it made it very difficult to buy a vehicle. Believe it or not, some people were actually buying used cars for more than the original price that someone paid for it as a new vehicle. So the market was crazy. But it's starting to settle out a little bit. I think by the end of 2025, you'll see numbers start to come back down, mainly because the new car inventory is starting to come back.

[Customer]

I'm just thinking in my head, you get the used card, you're getting a double at 30,000 at the minimum double digit interest rate. That's a hefty payment, man. That's a lot.

[Car Expert]

That's what people don't understand. The interest rate is so important, right? And when you do get a certified vehicle from the dealership, normally that'll come attached with a better interest rate. But used car interest rates right now are in the sevens. You know, 7 to 14% is what I'm seeing. So people don't realize this is very important. When you're shopping for a vehicle, you have to do the big math, right? Not just a little math. When the dealership tells you, oh, it's, you know, 80 to 90 or 100 more in the monthly payment. If you're doing a 72 month loan, right. Or a six year finance, that's $7,200 that you're adding in finance charges, right? Depending on what your interest rate is to the price of the car, right? So make sure you're aware of what the interest rate is. Don't, don't just buy based on payment. Does that make sense? Because if the higher the interest rate when on a simple interest loan. Okay, let's get into math, right. On a simple interest loan, which was what every car loan is, right. The bank collects their money first. So you're paying back the interest first. The, the money that you're making on your payment, let's just say you have a $500 payment. The majority of that payment in the beginning is going towards interest. Very little money is going towards your principal. So what's happening is your vehicle is losing value and you're not even touching the principal yet. You're paying all the, the bank wants their money back first, right? They're not worried about you paying off the car yet. Give me my money. So you're paying off the, the interest and then you're starting to hit that principal around the halfway mark is now when you start to cut into the principal. But what happens is that vehicle is depreciating in value. Not to mention, let's say that vehicle was in an accident. If that car got hit and now you have a bad carfax that dropped the value of the vehicle also. So you're accelerating the depreciation while you're still paying all of this interest. That makes sense.

[Customer]

Yeah, yeah, yeah.

Well, what before the used car, what about a warranty that comes with the.

[Car Expert]

So when you get a, when you get a certified vehicle, those, those normally come with an extension of the manufacturer's warranty. That's if the vehicle's, you know, still a fairly new car. Right. Let's say it's a two or three year old vehicle. Now you can buy extended warranties and a lot of these secondhand lots, they will send you an extended warranty. But you got to read the fine print. Some of them have deductibles, high deductibles, or they're certain, they only cover certain aspects of the vehicle. So you got to be very careful with those, you know, second hand warranties. Some of them are great, don't get me wrong, some of them are great. But you want, you have to do the, like I said, you have to do the research. You got to redefine print whenever you're signing these contracts. What I was talking about with the interest rate, when you're paying that interest and let's. The, the vehicle is depreciating. That's how you end up what's called upside down, where you owe more than it's worth. Right. You go to the dealership, you go to trade it in and they go, well, you owe 15,000, but the car is only worth 10. So what happens is people take that $5,000, roll it into their next car and essentially they're paying for that old car in the price of the new car. Not to mention they're paying interest on that also. So you have to be very careful with that. You can get into a really bad cycle of rolling negative equity into the next car and the next car and the next car. What I tell people who are in that situation is your best option to end that cycle is to lease a vehicle. Now what you're going to be paying more because you're gonna have to roll that negative equity into the vehicle. You may even have to put some money down on the lease so the bank can look at it as a favorable purchase. Right. Meaning why would the bank give you $40,000 for a vehicle that's only worth 30,000. Right. They're going to want to see some money down. But at the end of three years and you've made that, those payments on time, at the end of three years, you walk away. Now you're out of that negative equity cycle and your payment's going to be much lower.

[Customer]

Yeah, I'm glad you brought up that and the warranty piece because that can get tricky. A lot of times it'll be 50,000. You buy a used car, it already has 36,000. That means you're only 14,000 miles before having to get it extended. Then you have it for six years and that extended might go to a hundred thousand, but by the time you finish paying the six years, you've passed a hundred thousand. And so those are the type of payments that you can't account for. That will come up inside of that deal. But I'm walking.

[Car Expert]

Warranties work in two ways. Keep in mind it's mileage and time. So there's a thing, and a lot of people don't know this, there's a thing called data first use. It's called the dofu, right, Data first use. So your warranty starts from the date of first use. Let's say you have a four year warranty and you buy the vehicle in November of 2023, right? So that, that's when your warranty starts. So let's say you have a four year warranty. November of 2027 is when your warranty expires. If you come back and say, hey, you know what? Or let's just say you bought a 2024 in 2023, right? Because cars come out early, right? They come out for the pre, the, the next model year. You don't, you don't have a 20 till 2028. Let's say you bought a 2024 and has a four year warranty, but you bought it in 2023. Your warranty expires November 2027, not in 2028. So you have to keep in mind it's mileage or time, whichever one comes first. You can say, hey listen, I have a 48,000 mile warranty and I only had my vehicle for, you know, three years. If you hit that time, I'm sorry, I've had my vehicle for past the time that the warranty is allowed. You're out of warranty. Doesn't matter if you're under on your mileage.

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