New versus used car: pros and cons?

General wisdom says buy the 1-2 year old car so someone else takes the depreciation hit, but in reality I've found that in some markets, the new models can be around the same price (Subaru and Honda, I'm looking at you) AND the incentives are better. There's really no one-size-fits-all answer. If you can find a new car that is approximately the same price as the 1-2 year old model (and take interest charges into account -- the slightly more expensive new car with 0% financing might be cheaper than the slightly less expensive used car with a higher interest rate) then yes, of course you should buy it.

From an economics point of view, a market as large and as liquid as the car market is considered close to "perfect" - as in, all the buyers and sellers have good information as to the qualities of the product being traded (wear and tear, rate of parts replacement and servicing costs) and can thus price the product accurately (depreciation curve over the lifetime). Thus, for any given point on the curve - brand new, slightly used, very used, end of life - the price you pay should be close to a "fair" price and the average person would get fair value no matter what he bought - he should be indifferent to buying one a few years older or younger. The point of this is to say that you can rest assured there's no inherent "hidden" advantage to buying a new car vs a slightly used car vs an older car that hasn't been already factored in the sale price. What you must do however is take into account that you aren't the "average" person in the market - you have individual needs and preferences. For example, someone who loves tinkering with their car and is mechanically inclined would get more value out of an older car he can maintain himself, while a person who hates even opening the hood or changing a tyre would do best with a brand new car that requires minimal maintenance. The reason the depreciation curve is very steep in the first 2 years - and why a 1-2 year old car looks like a "steal" - surely the car can't have taken that much physical damage or deterioration in the first 1-2 years! - is that there's a self selection bias at play. Think about it - who buys a brand new car only to sell it within 1-2 years (still within the warranty period)? Perhaps someone who has encountered some persistent problem with the car which the dealer service team can't resolve - their best option is to sell it while it's still within warranty and let someone else deal with it. For example a friend who had their car in the workshop 4 times for transmission issues with the company failing to fix it each time but also denying there was anything really wrong with it... Basically, you don't sell a brand new car unless something has gone really wrong with it that can't be fixed. Of course, not all cars are like this - some people have other reasons for wanting to sell a relatively new car (relocating to other countries) but the risk factors here push the price down steeply on all new cars. The other thing about it is the new car warranty - it's a form of insurance, where your cost is higher on average than the benefits (the insurance company has to guarantee it makes money) but it limits your individual possible downside. You won't be stuck suddenly needing $3000 for engine repairs or something random, even though on average you're paying an above fair price premium for peace of mind. Think about it in terms of total lifecycle costs - a $30k car costs say $12k used after 5 years. Say you need a car for 10 years, and cars reach end of life at 10 years. You have the choice of buying a brand new car for $30k and using it for 10 years, or a 5 year old car for $12k and use it for 5 years, sell it for $2k and buy another 5 year old car for $12k... so that's $22k. Factor in stuff like extra maintenance and parts replacement...

http://www.mrmoneymustache.com/2011/04/19/how-to-come-out-way-ahead-when-buying-a-used-car/ is a pretty good writeup that covers a lot of your questions.

I'd go for new for this category of car. There's a lot of demand for a 2 year old fit/civic/corolla which pushes prices to within ~3k of new. If you figure that the used models have used tires, brakes, shocks, etc, then the ~3k is actually worth ~1.5k of new, because you'll need to replace that stuff 2 years sooner in the used car. If the new model is a new generation (which is the case with the fit, the corolla, and the civic), then upgrades in fuel mileage may make up a good bit of that ~1.5k over a few years, making the whole thing much closer to a wash. This only goes for those high-demand economy cars. A BMW or Porsche or SUV is maybe different story.

A really important point that people allude to above is that the new car depreciation curve has become dramatically more shallow in recent years. Buying new used to be an exercise in vanity or extreme particularity of taste; it's now a reasonable move for all kinds of situations. Why has the depreciation curve flattened so much? * People got wise, too wise -- enough people chasing 1-3 year old cars, with (thanks to the Internet) an effectively nationwide market for every used car, and, voila, 1-3 year old cars start to get expensive * New car production fell off a cliff in 2008 and only recovered very gradually -- the supply of recent- and (now) mid-vintage used cars relative to demand is historically low * In addition to the national Internet market, there's a thriving global export market for lightly-used cars -- too many 2011 Camrys on the auction lot on Thursday cheap Camrys on the used car lots on Sunday, it = a pile of Camrys on the boat to Khazakstan. * Significantly cheaper financing and warranties for new cars vs. even lightly used cars lowers the total cost of ownership advantage.>

And I just noticed you're paying cash. If you can get 0% financing on a new car, and then put that lump sum into something that earns interest instead, you'd be better off than paying cash upfront.

I bought a new car once. It was great. Had 6 miles on it. I took care of it meticulously. I knew everything about it, its history, and what needed to be done. 10 years later it looked, ran, and felt brand new to me and whomever rode in it with me. I got it new for the 0% financing. No downpayment. Kept up on payments, etc. Next, I looked at used cars. BUT, they were *slightly* used...no more than two or three years old at the very most. I will now only buy used cars like this. Why? Because I was able to get a ~$30,000 car for ~$12,000 that was three years old. Still looked and drove like a brand new car. Wasn't 0% interest on the loan, though, but I did have a huge downpayment. Downside includes that I am still finding weird things the previous owner did even though I have had the car for 6 years, but so be it. I can handle it. I never, ever though I would ever even touch a car that was originally in the $30k range, and I got it for third the price. As far as very used cars? I tried it once. Spent $6,000 on a car that lasted 6 weeks. No warranty of course. Very expensive two months of my life in that regard. So, my whole point here is that I suggest the "slightly used" market for a car. But that will very with your region and time of year and used car market at the time (which changes greatly, by the way). Some "slightly used" cars with interest on the loan will cost you MORE than the same car, brand new, 0% interest. Other times, you can get a car at 1/3 the price like I did. Do the numbers and such, and your mileage may vary.

I would get the newest used car you can afford to pay cash for. You'd save all around--on initial price and on interest.

Whenever I hear friends talking about the cost of having their 2- or 3-year old car fixed by the dealer, I find myself thinking "but you could buy a car for that!". This. I have never paid more than $3500 up front for a car, and never intend to. If what you're after is cheap, reliable transport: buy something small and Japanese with a manual transmission after paying a mechanic you trust to check it out thoroughly, then have the same mechanic deal with any issues that are likely to strand you by the side of the road. Bodywork rust is pretty much the only instant dealbreaker. Anything and everything else can be replaced for well under the difference between the price of a half-decent old car and a relatively rubbish new one. If you can't achieve dependability for under $6000, including initial purchase costs and all required mechanical work for the first two years, you're dealing with the wrong mechanics. Naturally, this advice is useless to people who view their cars as any kind of status symbol - or maybe not: personally, if I planned to spend the $35,000 on car acquisition that seems de rigeur these days, I'd get seven little Japanese cars, each one a different colour of the rainbow, and park them out the front of my house wearing personalized number plates reading MONDAY, TUESDY, WDNSDY, THRSDY, FRIDAY, SATDAY, SUNDAY.