Car buying: Now's the time to consider new over used

Car buyers have all heard it: you’re a fool to buy new because of depreciation. Or are you?

While there’s no arguing that a new vehicle starts to lose value the second you drive it off the lot, purchasing new doesn’t necessarily make you a sucker.

“I would suggest that there’s never been a better time to buy new than right now,” says automotive journalist Zack Spencer, founder of the car-review and-information site MotorMouth.ca.

“A lot of people want to buy used because of the deprecation, and there’s something to be said for that. But we live in a time where cars are expensive, and to buy a car and own it outright is not the reality for most people. Most people are payment-based.”

How much does a new car drop in value as soon as you leave the auto mall? It depends on who you ask.

According to autoTrader.com, a new car loses, on average, between 20 and 30 per cent of its value the moment it rolls off the dealer’s lot. Some cars can depreciate up to 50 per cent in the first three years.

Car-info site Edmunds, meanwhile, states that, on average, a new car loses 11 per cent of its value the moment it leaves the lot. During the first five years, the car depreciates by 15 to 25 per cent each year, and after five years the car is worth 37 per cent of what you paid at the dealership.

However, if you plan on driving your car into the ground, then experts say depreciation has no effect on your purchase.

Take advantage of incentives

What makes the purchase of a new car achievable now are incentives that so many manufacturers offer, from rebates to cash to low financing. Financing a used car almost always requires money down, either in cash or a trade-in with equity.

“Auto manufacturers are providing all kinds of incentives and cheap financing, so the cost to buy a car and finance it are very, very low,” Spencer says.

“Many have zero per cent interest or very low finances: 1.9 or 2.9 per cent. If you go to a bank and get a car loan to buy a three-year-old Honda civic, they’re not going to charge you zero per cent interest or 2.9 per cent, so your carrying costs on that money are much more expensive than buying that new car.”

Two other factors are making buying new seem especially appealing at this point in time. One is the competitiveness among manufacturers. Sales of new cars across Canada were up 4.4 per cent in November 2014 from the year before, according to Statistics Canada,from 135,776 to 141,763.

With so many Canadians in the market for new wheels, car-makers are turning to other offers to attract customers aside from discounted financing. They may be bundling in more features such as heated seats, Spencer says, or offering free maintenance for the first few years of ownership. The latter is a point worth considering given the costs involved in keeping up a used car.

Lower loonie

Another factor favouring new over used these days is the weak dollar.

“The used-car market here in Canada is probably going to get tight now because a lot are getting pulled out and going to the States,” Spencer says. “People who buy at auctions are coming to Canada and scooping up cars and taking those cars out of Canada and selling them in the United States. They get a 20 per cent premium and are making their money on the currency exchange. Good, low-mileage used cars could be hard to find in the next year.”

An alternative to buying new or used, of course, is leasing, which typically offers more car for less money.

“One thing about leasing that a lot of people don’t realize is that it’s the world’s greatest test drive,” Spencer says. “You can drive car for three years and if you really like the car and you want to keep it, you have the option [to buy] when the lease is done. However if the car has been problematic, in for repairs over and over, you can drop the car off and the keys off [at the end of the term].

“Buying used is often best when you don’t have a big budget and you’re looking at an inexpensive car,” he says. “But if you’re somebody who likes to change your car every three or four years or can write it off through business or want the cash flow, buying new or leasing is better.”

As with anything, shop around. Spencer points to two cars that can be purchased new for under $10,000: the 2015 Nissan Micra and the Mitsubishi Mirage, both starting at $9,998.

“If someone has $10,000 to buy a used car, you can buy brand new with a warranty for that same price,” he says. “Who would have thought that? They’re rather basic cars, but for a first car or second car or basic transportation there’s really no downside.”