Should you buy a new or used car?
How to calculate what the best deal is now and what the best deal will be after a few years.
Traditionally, the August to November period is a prime car buying time, particularly for new cars, as dealers are trying to clear out current models in order to accommodate next year's. This is also when many first-time buyers are looking for their first wheels after (hopefully) landing a full-time job following graduation.
The Internet offers a great deal of information from top ten buyers' tips to highly authoritative sites devoted to the almighty auto. Two of the best are Edmunds.com and Autos.ca — formerly Canadian Driver. 'And for car news and reviews, travel, a handy car shopping tool and a loan comparison calculator go to MSN's Autos site (MSN Autos is affiliated with MSN Money).
Both websites do an excellent job covering all the basics of a car purchase from what kind of car you need and how much you can afford to test driving tips and the debate over new versus used.
These points are all important but I think there are two often overlooked yet critical considerations when buying a car — how much it actually costs to run and the value of your investment down the road.
The real costs of car ownership can be sobering. The Canadian Automobile Association (CAA) provides an annual survey that gives a good perspective on this, though it's important to remember that every situation is different.
In their 2012 survey the CAA projects that annual operating costs for a brand new four-cylinder Honda Civic LX driven 18,000 kilometres a year amounts to $2,322 annually or 12.9 cents a km. (The Camry LE was 16.68 cents per km while a Chevy Equinox LT came in at 16.44 cents per km.)
Add in insurance, registration and license for the Honda and you can chalk up another $2,591 for a total of $4,913 annually (not including financing costs). Of course, expenses will vary with the driver's age, driving record, type of car and where you plan to drive it. For example, car insurance is usually more expensive in cities than in small towns or rural communities. Still, the Honda has one of the lowest operating costs of new cars so the information provides a useful yardstick.
When you think about it, $4,900 (more than $400 a month) pays for a lot of public transportation and taxis annually with some left over.
When deciding between used versus new, carefully weigh the impact of financing costs, taking into account rebates and special offers. On the face of it, the used car will cost less but unless you pay cash, financing charges will be in the eight to nine per cent range. Though not as prevalent as they once were, zero per cent new car deals are available.
Here's one new vs. used comparison, both are 100 per cent financed, but tax is not included.
Example 1: $14,825. According to the Canadian Black Book (CBB) this is the average asking price for a 2010 Toyota Corolla S 4D. The payments would be $305.83 monthly at nine per cent interest over five years. By then the depreciated value, according to CBB's Future Value Calculator, would be $5,100.
Example 2: $18,350. According to the CBB this is the average sticker price for a new 2012 Toyota Corolla S 4D. The payments would be $307.74 a month over five years at zero per cent interest. At that time the calculator estimates its value would be $7,600.
Over the five years you will actually pay $114.60 less when purchasing the new car, but it will lose $1,025 more than the used model on the difference between the purchase price and its estimated future value.
I chose the Toyota Corolla because it holds its value well and by selecting two models of the same car you get a good comparison over time. But there's no reason you can't go through the same exercise with a new Honda and, say, a used Ford.
One of the best options for first-time car buyers is a late model vehicle with warranty protection remaining and purchased outright. Though, these days, few can save up enough to do this.
Whichever route you choose, spend the time examining the true cost of buying and operating a car, the value to your pocketbook of a full warranty versus a limited 90-day guarantee and how much the asset will be worth at the end of the financing.
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