New Car versus Pre-Owned

I often get questions from readers and sometimes I'll answer them here. If you have questions you'd like to ask, please email me by clicking on the "Contact Ray Martin" link to the left.

Question:
I am looking at buying a Volkswagen Jetta TDI. I am wondering if it would be better to get a previously owned Jetta with about $5,000 down and the rest financed or to get a new one with 0% financing? New is about $27,000 and pre-owned is about $22,000, and the interest rate on the loan would be 6.22%

Thanks

R.Russel

Ray Answers:
Either is a pretty good choice....but let's take a look at the numbers:

Buy PRE-OWNED VW Jetta TDI:

• Purchase cost: $22,000
• Sales tax (will assume 5%): $1,100
• Down Payment: $5,000
• Loan payments for 5 year loan at 6.22%: $331 per month, $19,824 total.
• Total purchase costs: $25,924

Buy NEW VW Jetta TDI:

• Purchase cost: $27,000
• Sales tax (will assume 5%): $1,350
• Down Payment: $0
• Loan payments for 5 year loan at 0%: $450 per month, $27,000 total.
• Total purchase costs: $28,350

In this situation, when the total purchase cost of buying pre-owned is compared to buying the new version, the additional savings over the five year period works out to about $2,426 ($25,924 versus $28,350). This is a savings of about $40 per month for 60 months.

But you also need to consider that the pre-owned car could need additional maintenance and repairs (tires, brakes, new battery, etc.) where the new one should be maintenance free for the first few years. It's very important to check out the maintenance history of a used car before you buy it. Any additional repair and maintenance costs could quickly add up to more than the $2,426 savings over the five year period.

Before you jump in and buy new, check out the cost of insurance on each vehicle. What you will find is that the cost of the insurance on the new car can be significantly more and that will add to the cost of ownership over time.

If it is possible you could be selling the car in the next several years, then also consider the cars value down the road. Generally cars take their biggest depreciation hit in the first two years and the value drops more slowly after that.

Ray Martin

View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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