The decision to buy a new or used vehicle can be a complicated question. A vehicle is a big purchase, so it’s important to do your due diligence to decide which option is the right fit for you. As you consider your next move, think about your budget, lifestyle and other preferences to make the decision that works best for you.

Benefits of Buying a New Car

Buying new instead of used isn’t for everyone. If you have the budget, however, there are several pros to keep in mind:

  • Better reliability: Newer cars tend to be more reliable than older cars because they don’t have a lot of miles on the odometer and no wear and tear on the engine or other key parts. While it’s possible that you’ll buy a car that has factory defects, most new cars come with a manufacturer’s warranty that will cover certain repairs if you run into issues.
  • Lower interest rates: The average interest rate on a new car loan was 4.12% in the first quarter of 2021, according to the State of the Automotive Finance Market. In contrast, the average rate on a used car loan was 8.7%. Manufacturers often offer financing deals on new vehicles as a way to incentivize purchases—some go as low as 0% APR for buyers with excellent credit.
  • Better driving experience: When you buy a new car, you’ll typically get the most up-to-date technology and innovation for an improved driving experience—not to mention that new car smell.

Benefits of Buying a Used Car

Although there are some clear advantages to buying new, there are also some solid reasons to consider buying a used car instead:

  • Lower cost: Vehicles rapidly depreciate once they’re sold, which means used cars are generally less expensive to purchase. That lower sales price also typically translates to lower insurance rates. And since the vehicle’s previous owner was the one to bear the massive 20% depreciation new cars typically experience during the first year they’re on the road, you won’t have to worry as much about becoming upside down on your auto loan as your vehicle loses value. If your budget is tight or you simply don’t want to spend much money on your next vehicle, a used one may be the ticket.
  • High-quality options are available: New cars are generally more reliable than used ones, especially with a warranty backing them, but that doesn’t mean you can’t find a solid used car. Many dealerships offer certified pre-owned vehicles, which means they’ve been thoroughly inspected and refurbished to meet stringent standards of quality and reliability. Some automakers even offer a warranty on these cars. If you shop around enough, it’s easy to find a used car that isn’t a clunker.
  • Faster payoff: If you need an auto loan to help you buy your car, you could opt for a shorter repayment term and still save money on a monthly basis compared with a new car. And if you decide to get a longer repayment term to lower the monthly payment, the sting of interest costs won’t be as painful.

Should I Buy a New or Used Car?

When it comes to buying new or used, there are pros and cons to both. For some people, certain disadvantages can be a deal-breaker, especially when it comes to their budget. But it’s important to apply the pros and cons to your situation to determine the best fit for you. Here are some situations where it might make sense to buy new:

  • You can afford it. Budget issues are one of the biggest reasons people don’t buy new cars, and because they depreciate so much in the first year alone, you’ll need to know that you can afford to cover any negative equity you might have if the vehicle gets totaled. Gap insurance can help protect you in this case, but that’s another added cost to consider.
  • You want the latest and greatest. Automotive technology has made great strides in recent years with the addition of safety features like lane-keeping assist and collision avoidance sensors as well as cutting-edge self-driving functionality. This may be appealing to you, or maybe owning a new vehicle is simply an important part of your lifestyle. If these are your priorities, buying new may be worth the extra costs.
  • You want fewer worries. Even certified pre-owned cars can come with issues. If they arise after the short warranty period expires, you’re on the hook for repairs. With a new car, you won’t have to worry as much about reliability, and you have more options if something does go wrong.

In contrast, here are some scenarios where you may decide to buy used instead of new:

  • You want to save money. Even if you can afford a new car, you may want to put that extra cash flow toward financial goals such as building your emergency fund or saving a down payment on a house. If you want to avoid high monthly payments and insurance premiums, consider buying a used car.
  • You have time to do your research. When you’re buying used, it’s a good idea to vet a vehicle thoroughly before buying it. That can include looking up the vehicle history report, requesting service records and taking it to a mechanic for an inspection. You’ll also want to compare similar options on the market for the same model because prices can vary and some drivers treat their vehicles better than others. If you have the patience and willingness to go through this process, buying the right used car can be a great option.
  • You want to pay with cash. It’s not unheard of for someone to buy a brand new car with cash, but it’s more commonly done with used vehicles. If you want to avoid an auto loan, you’ll have an easier time finding a used car within your budget.

How Does Buying a Car Affect Your Credit Score?

If you’re planning on buying your next car with cash, the transaction won’t impact your credit score at all (unless that cash comes from a loan). If you’re financing a new or used car with an auto loan, it can affect your credit in a few ways. For starters, when you apply for an auto loan, the hard inquiry lenders make on your credit reports has the potential to decrease your credit scores temporarily. This impact is typically small and short-lived, and shouldn’t be a big concern for most borrowers. If you plan to apply for multiple auto loans in search of the best rate, submitting applications over a period of less than two weeks will minimize the score impact. Adding more debt to your plate can also impact your credit, especially if you didn’t have a similar amount of debt on your previous vehicle. If you make your payments on time, though, a car loan can help improve your credit over time. But if you miss a payment by 30 days or more or default on the loan, it could have a drastic negative impact on your credit score. As such, it’s crucial that you buy a car that you know you can afford. If you’re struggling to keep up with payments, contact your lender to discuss your options before you miss a payment.

Check Your Credit Before You Buy a Car

If you’re financing your next vehicle, it’s important to make sure your credit is ready. Auto lenders may use credit scores based on reports maintained by any one of the three credit bureaus (Experian, TransUnion and Equifax), and you can get these reports for free through AnnualCreditReport.com. The higher your credit score, the better chances you have of scoring a low interest rate. You can check your FICO Score for free through Experian to get an idea of where you stand, and review your credit report to see if there are specific areas you can address. If your credit isn’t where you want it to be, and you can afford to wait to buy, consider taking some time to improve your credit before you start the car-buying process. That time and effort can ultimately save you hundreds or even thousands of dollars on interest.

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