Last Updated on December 20, 2020 at 10:04 am
In this article, we talk about the financial considerations in deciding between buying a new car vs used car and how to optimise our purchase and maintenance. We will touch upon other non-financial and practical considerations too. You may also refer to the prequel article in which we talked about the general Financial Considerations and optimisations while buying a car.
About the author: Ragesh G R is a Software Architect with 13 years of experience. His interests are computers, personal finance, cars, technology, maths and music. He helps his friends and family with their personal finance. Also, he actively guides physically challenged people all over India with buying and registering cars and procuring driving license via his blog at Ragesh in Full Throttle! Check out his other articles: (1) optimising a car purchase (link in 1st para) and (2) What you need to know before buying term Insurance.
Most of the considerations we talked about in the previous article apply to buying a used/old car too. For example, you know the price of the vehicle; you know the probable maintenance of it and so on. So in this article, we will look at the specific case of buying a used car and its financial considerations. We will also evaluate the pros and cons of buying a used car as opposed to a new car and whether it is worth it in the first place.
Reasons for considering a Used Car: A used car can be considered for the following major reasons:
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- Significantly reduced price for the car you want.
- Much superior car (bigger, more powerful, more spacious etc. as per your preference) for the money that you can afford.
In either case, you are getting a better deal on paper as opposed to a new car. But one can’t have one’s cake and eat it too. Let us took at the Pros and Cons and the tradeoffs of buying an old car.
Buying a used car: Advantages
- The car you want is available at a much lower and affordable price. This can help you in two ways.
- You have spare cash/wiggle room which can be deployed in other avenues like investment or even ear-marking it for the car’s maintenance.
- You reach your goal early. Instead of investing for four years to buy that new car, you can buy the same car in its used version in 2 years.
- For the amount of money that you can afford, you can buy a much better/higher segment car that you longed for but is unaffordable in its brand new form. For example:
- For the same cost as a base variant of a car you love, you can afford the top variant with all its bells and whistles, and sometimes even more power and safety features.
- For the same cost as a new car in, say a compact sedan segment, you can afford a much more spacious, more luxurious, more powerful sedan from the mid-size sedan segment which you love.
- For the same cost as a small car, you can afford a 6-seater MPV if your family is large, and so on.
- Exploiting the depreciation
- Cars lose maximum value in the first 1-3 years of ownership. If you buy a car and take a U-turn and sell it in the same showroom then and there, you will lose 10% right there. Most cars lose 25-40% of their value in the first year. So when you buy the used car, the peak depreciation phase is already over. People have already screamed in the roller coaster. You are getting at the plateau phase.
- The depreciation for you is low; the corollary to the same reason as above. Once you buy a used car, the depreciation for you won’t be as steep as it was for the first owner. This will help when you resell it.
- Extended support and Warranty
- These days, most companies/dealers have their own professionally run used-car wing. So one need not deal with shady strangers and obscure dealerships.
- They even have certified used car programmes where the used car is checked and refurbished if required. This gives you a professional buying experience with support. So it is almost like all the thrills without the spills.
- Many companies these days have up to 7 years warranty. So, for example, even if you buy a three-year-old car, you can still enjoy up to 4 more years of warranty support from the company, which gives you peace of mind.
Buying a used Car: Disadvantages
All that glitters is not gold. Everything has a trade-off. Let us look at some of the pitfalls of buying a used car.
- An old elephant is still an elephant! Even though the car is old and depreciated in its value, it is still that premium car. So this will mean you need to account for the following high cash outflows.
- Insurance: The Insurance for a car of a higher segment will still be commensurate with its class. (Even though the IDV will reflect the depreciation to some extent). Just because a new Swift and an old Vento are available at 7 lacs, does not mean their insurance premium will be the same. Vento insurance premium may still be higher. So one needs to plan their finance accordingly.
- Maintenance: There is a double whammy here:
- However depreciated the car is, maintenance will cost just as much as a new car, be it parts or labour. There are no two ways about it. So if you find a mouthwatering deal on that super luxury car for the price of a small car, one major repair can break your bank if you are not prepared. So one needs to keep that in mind.
- Since the car is old, chances are, more repairs and maintenance works might come your way. Even if the car is in spic and span condition, you will still incur higher maintenance early on, since the car may be due for its mandatory clutch replacement or tyre replacement etc.
- So a general tip is. Stick to a car just one or two segments above of the corresponding new car that you can afford. In that case, you will still be able to afford the maintenance without strain. For example, if all you can afford a new Swift, stick to a used Baleno or Used Ciaz or an S Cross at max. If you buy that 10-year-old Suzuki Kizashi for 6 lacs, you will be in for a shock.
- Risks
- There could be concealed history of incidents, defects and repairs. Such concealing can happen at both the dealer level and individual seller level. One needs to put some extra effort in running a background check.
- Even a relatively new sub-one-year-old car may have some parts worn out. For example, suspension warranty on most cars is only 6 months – 1 year, because it is considered as a consumption item. So you may have a car that doesn’t ride as good as new, or you may have to cough up money to replace worn out parts. Same applies for other consumption parts like brake pads and rotors.
- One needs to ensure that name on RC is transferred properly to avoid any legal complications for both buyer and seller. That can be a bit time-consuming.
- The car could have been abused in a way that is not apparent now but may have long term ill effects on the engine. For example, lugging the engine at low RPMs in the wrong gear, giving the beans to a cold engine, switching off a turbo car immediately after a high RPM run, running the car till the fuel runs dry, running a car with extremely low coolant level, and so on.
- Minor niggles, rattles and other annoyances that are inevitable with a used product.
- Loans for used cars may have higher interest than new ones. It may be more difficult to procure too.
- No new car smell, less euphoria ☹
- Less snob value (But we are beyond that right? Or, so I thought)
General Tips
- Buy from reputed dealers or trusted individuals. In used cars, peace of mind, ethics and reliability may be more valuable than a discount in the long run.
- Buy a car that is still current generation, unless your budget is too tight and you are ready to take on the extra risk of having an outdated model.
- Buy a car that is still in factory warranty for extra peace of mind.
- Buy a car that is less than 3-4 years old. The steep depreciation phase is over. The car might still be under warranty. Car is still not outdated. Spares are available. And it is still reliable and healthy and not showing signs of ageing—more peace of mind for us.
- Try to buy with full payment as loans may prove expensive.
- Evaluate the service history of the car by approaching the dealership. They may do it for a fee. Take a trusted, knowledgeable friend or mechanic along.
- Don’t be pressurized into buying; if something seems amiss, your gut feeling is probably right. Walk away. Don’t fall for any scams. These are easily noticeable. You will see weird behaviours and cooked up stories such as; after giving you half the money they will ask you to transfer the car and say that someone died or some drama like that.
- After you buy a used car, get it checked/serviced and do any replacements that are needed. Assuming you were already aware of these and not surprised.
- Many owners put rickety old tyres before they sell. If you still want the car, then change the tyres as soon as you buy it. Do the same with brakes too. I can’t stress this enough. Tyres and brakes are the most important things in a car from a safety perspective. It is the difference between life and death. Even if the engine fails, you can walk away. Your life depends on those few square inches of rubber on the road. Don’t skimp on tyres. However old the car is.
- Ensure that the car has a clean history and is serviced well.
- Cross verify all the documents.
- Don’t get swept away by an ancient car with very low mileage on it. Cars develop most problems while sitting idle in the garage. First, they feel bored, and then they become depressed. All that glitters is not gold!
- Get the interiors, and AC vents cleaned, vacuumed, and disinfected. Probably buy new mats and steering covers too (If the car already has aftermarket steering cover that is). Btw this has nothing to do with the current situation. I would have advised the same, even if this article was published 3 years ago.
- No need to go all out with exterior detailing, unless you really want to. A good wash should be enough.
- Take care of it like a new car!
Summary
Buying a used car can be an efficient way to save money on your car purchase and get maximum bang for your buck. But one needs to be patient, do extra due-diligence, be aware of the caveats, ear-mark, more funds than the reduced price tag suggests, not get carried away either and be ready to take extra care in its maintenance. As always, one size doesn’t fit all. All depends on your situation, preferences, knowledge, time and effort that you can spend as well.
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