A witches brew of COVID-related lockdowns, renewed demand after those initial lockdowns were lifted, ensuing shortages of semiconductors, and other auto supply issues have thinned out inventory for vehicles. All of the above combined to force car prices higher in 2022.
How high? Data from Cox Automotive pegs the average price of a new vehicle at $41,000, which represents a 5.5% upward spike in price compared to 2020. Used vehicle prices are on the rise this year, as well, with the average cost of a used vehicle with 67,000 miles on it standing at $24,414, compared to $19,646 in 2020.
Higher car prices make auto-buying decisions more difficult to make in 2022, and that’s especially the case with the time-honored dilemma of buying a new or used car this year. This year, it’s not an easy choice, but with the right information, you can make the choice that works for you.
Benefits of Buying a New Car
Besides the luster and pride in a brand new set of wheels, a new vehicle purchase has additional benefits.
• You don’t have to kick as many tires. New vehicles arrive on dealer showroom floors (and at online auto sales platforms) in pristine condition with very few miles on the odometer, so you don’t have to spend time checking for vehicle inefficiencies and maintenance or repair issues.
• Multiple auto financing choices. With a new car, it’s easier to get a good financing deal compared to financing a used car. That’s because the vehicle hasn’t been driven, has no structural problems, maintenance, or repair issues, and should hold its value if the new owner takes good care of the vehicle. That’s important to auto loan financers, who place a premium on avoiding risk.
• The newer, the better. The auto industry is doing wonders with new vehicle construction, with features like electric-plug-in models, better gas mileage and technology advancements that improve vehicle performance in a wide range of upgrades. Those upgrades come most notably in car safety, cleaner emissions, and digital dashboards that improve driving enjoyment.
• Warranty and service benefits. New car owners are typically offered a manufacturer’s warranty when they buy a new car, which typically grades out better than third-party warranty coverage on a used car. Additionally, auto dealers are more likely to offer services like free roadside assistance or free satellite radio to lock down a new car sale. Those services and features are harder to get with used vehicles.
Recommended: How to Save Up for a Car
Drawbacks of Buying a New Car
Some disadvantages of a new car purchase might sway a buyer’s decision.
• Immediate depreciation. The moment you drive a new car off the dealer lot, it loses several thousand dollars and an estimated 15% to 20% in the first year of ownership.
• You may owe a lot of money on the vehicle. As car costs escalate, buyers who borrow 80% or more to purchase a new car, truck, or SUV may owe tens of thousands of dollars in auto loans before they’re free and clear. According to data from Lending Tree®, the average monthly payment for a new car loan stands at $563 in 2021.
• Higher insurance costs. Auto insurers typically deem new cars as being more valuable than used cars and assign auto insurance premiums accordingly. According to Bankrate.com™, the average cost of minimum auto insurance in 2021 is $565 per year. Since new cars cost more, auto insurers prefer to see new auto drivers get full coverage and not minimum coverage. The price for full coverage, Bankrate reports, stands at $1,674 annually.
Benefits of Buying a Used Car
Used cars offer buyers value and savings, which are attractive benefits to drivers who may not have a big budget, but still want to drive a quality vehicle.
• You’ll probably save money. No doubt about it, most used cars sell for significantly less than a new car with the same make and model. Case in point. The National Automobile Dealers Association (NADA) notes the average American owns 13 vehicles over the course of their life, with each vehicle valued at $30,000, on average. If a buyer waited three years to buy the exact same vehicles, NADA stated, that buyer would save $130,000 by not paying for the cars when they were brand new.
• Slower depreciation rate. New cars tend to lose value quickly, especially if they’re not properly cared for. But used cars tend to depreciate more slowly, especially if they’ve had regular maintenance, and their sustained value makes them a good resale candidate if the owner wants another vehicle, but still wants to make a good deal when selling the vehicle.
• A large down payment goes further with a used car. Buyers who can manage a robust down payment on a used vehicle can bypass a good chunk of the debt incurred in purchasing the vehicle. It comes down to simple math—if a buyer purchases a $20,000 used vehicle with a down payment of $10,000, there’s only $10,000 left to pay on the vehicle. If a buyer purchases a new vehicle for $40,000, and puts $10,000 down, that buyer still owes $30,000 on the auto loan.
Recommended: 9 Tips For Buying A Used Car
Drawbacks of Buying a Used Car
When deciding whether to buy a new or used car, these issues may be worth considering.
• Reliability is a big deal. With a used car, an owner may be getting a quality vehicle—but maybe not. A used car may have spent years on the roads and highways, incurring a fair share of dings, dents, and general wear and tear that may have aged it prematurely, particularly if it hasn’t been maintained well.
• You may not get the exact make and model you want. The options can dwindle when it comes to buying a used car. Whereas auto dealers can offer a wide range of make, model, and color for a new vehicle, those choices can be significantly limited with a used car, truck, or SUV. That could mean that a used vehicle buyer may have to compromise on different factors, in contrast to a new car buyer who can usually get their vehicle of choice.
• You may pay more for vehicle maintenance. Consumer Reports found that auto repair costs double every five years, so the longer you own a used car, the more money you’re likely to pay in maintenance and repairs.
Other Car Purchasing Options
Auto consumers don’t have to be limited to a “buy new or used car” purchase decision. There are other valid options that go beyond the question of “should I buy a new or used car”: buying a pre-owned car or leasing a vehicle.
Certified Pre-Owned Cars
Car buyers who want to know that a vehicle is ship-shape, but who don’t want to spend a great deal of cash on a new set of wheels can compromise with a certified pre-owned vehicle.
A certified pre-owned vehicle means just what it says—it provides buyers with a vehicle that has low mileage, has no significant damage, has passed a battery of auto shop maintenance and performance tests, offers a new warranty, and likely costs thousands of dollars less than a new car. While you won’t be getting a brand-new car, you are likely getting a vetted and trustworthy vehicle at a decent price, which fits the bill for legions of would-be car owners.
Recommended: Smarter Ways to Get a Car Loan
Leased Cars
By leasing a car, you’re not buying it, you’re just renting it for a fixed period of time, usually with the option to buy the vehicle after the lease period is over.
Most auto leases average three or four years, and upfront costs are typically less than purchasing a new car (lease owners pay an upfront fee plus regular monthly payments for the duration of the lease period.) Once the lease period is over, the driver has the option to return the vehicle to the dealer, who may either lease it again or sell it outright as a used vehicle.
Car leases do come with restrictions on key performance elements like mileage, and also require that the vehicle is returned in sterling condition when the lease period ends. Ignoring those issues can lead to hefty fees charged by the lease provider and owed by the leasing customer.
Typically, about 26% of auto consumers decide to lease their vehicles, with an average monthly price of $460 per vehicle.
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The Takeaway
Like any major purchase decision, auto buyers are advised to shop around, check the book value of favored vehicles, and look at the car’s maintenance and repair history to ensure it’s in good condition, and (if it’s a used car) make sure it’s inspected by a trusted mechanic.
By doing these things, the choice between a new and used car can get easier and enhance your chances of driving away in the vehicle that best fits your auto needs.
Saving for your next used car purchase or down payment on a new car can be challenging, but with an online banking account from SoFi Checking and Savings, the savings can add up, helping to reach a financial goal as quickly as possible. SoFi Checking and Savings account holders pay no account fees, have free Allpoint® Network ATM availability, and the ability to earn interest on the money in their account. They can also save for other goals in addition to that future new or used car purchase by setting up Vaults in their SoFi Checking and Savings account—no need to have separate accounts for separate savings goals.
Photo credit: iStock/Ivanko_Brnjakovic
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