When you set out to buy a new-to-you vehicle, one of the first questions to ask yourself is whether your next vehicle should be used or brand new. You’ll find plenty of very strong opinions on this subject, but the truth is there are benefits and drawbacks to buying both new and used vehicles. Only you can decide which factors are most important for your living situation and budget.
To help figure out the new vs used car debate, we’ve outlined the reasons to buy a new vehicle versus the reasons to buy a used vehicle below. These include factors such as up-front cost, insurance, warranty coverage, technology and safety features, and fuel efficiency. Plus, we’ll look at what vehicle depreciation is and how it should affect your decision about buying new vs used car. There’s also an in-between option called Certified Pre-Owned vehicles, which aren’t entirely new but come with some new-car benefits, as we’ll explain below.
New vs Used Car
Is it better to just get a new car?
For some drivers, buying a brand-new car is the right decision. It’s rarely the most budget-conscious choice, but it does provide a stable payment structure and warranty coverage that protects you from some high-cost repairs early in the car’s life. Having access to the latest safety and convenience technologies can be another motivation.
Here are some of the reasons to buy a new car.
1. You need your car costs to be stable
The top reason to choose a new car over a used car is if your financial situation makes it difficult to cope with unexpected expenses. All new cars come with a period of warranty coverage, which means you won’t be on the hook for unexpected costs due to manufacturing defects. Warranty length and coverage varies by automaker, so it’s worth doing some research to understand the differences. A longer warranty is better, especially if you expect to need a long financing term. (Find more info on this in our Financing section.)
Warranties don’t cover scheduled maintenance like oil changes or tire rotations. They also don’t cover crash damage or issues that come up due to negligence (so get those oil changes done on time!). Be sure to leave an allowance in your budget for these costs.
2. You can finance for very low or no interest
The two biggest unrecoverable costs you’ll incur when buying a new vehicle are depreciation — more on that in a minute — and the interest on your car loan. If you can buy a new vehicle and pay little to no interest, then that takes one of those costs out of the equation. It can save you a bundle of money in the long run.
Let’s say you’re looking at a $40,000 new SUV and a $35,000 used SUV, and you want to pay off your loan in five years. It looks obvious that you’ll pay less for the used SUV, right? But what if the new SUV has a financing rate of 0.9%? Your monthly payment will be $682.03, and by the end of the loan, you’ll have paid $921.80 in interest. For the $35,000 used SUV, you’d be looking at an interest rate of 7%. This means your monthly payment will be $693.04, and you’ll pay $6,582.00 in interest over five years. In this (admittedly oversimplified) scenario, you actually end up paying more for the used SUV than for the new one, and it’s all interest payments you’ll never see again. Plus, you get less ownership time with the vehicle under warranty.
If you’ll need a loan to purchase your next vehicle, it’s so important to check the lowest rates available for new and used vehicles and run the numbers on each scenario. Sometimes, the rates on new vehicles are high and buying used makes more sense. But if you can find a new vehicle you want with a low interest rate, that might be the best move.
We used the Innovation, Science, and Economic Development Canada’s Vehicle Lease or Loan Calculator to work this out. You can use this same calculator yourself by clicking here.
3. Modern safety is important to you
Safety features and driver assistance technologies have come a long way in the last few years. If you want access to newer features like rear seat reminders, semi-autonomous highway driving technologies, or more of the latest innovations, you’ll most likely need to buy a new car. (In some cases, a late-model used car may make the features you want available to you. But again, you’ll need to run the numbers to see what makes the most sense.)
4. Fuel efficiency is important to you
There are two reasons why a new vehicle may be the way to go if fuel economy is a make-or-break factor in your car purchase. The first is that today’s cars are just generally more efficient than those from even a few years ago. This is not only because there are more electrified vehicles on the market — check our guide to the different types of cars to learn more about these — but also because many new vehicles today are equipped with more efficient and smaller-displacement engines.
The second reason is because every car’s engine becomes less efficient as it ages. This is a difference that’s hard to quantify, and the amount of fuel economy lost changes in every vehicle. But as a general statement, you’d pay more to fuel up a 10-year-old SUV than you would today’s version of the same vehicle, even if they were sold with the exact same engine and fuel tank.
5. You like being on top of the latest gadgets and technologies
If you’re the sort of person who’s lined up outside the Apple Store at midnight when the newest iPhone is released, then you might not have the patience for older vehicles that can’t keep up with the times. Tech-savvy buyers who care about features like wireless Apple CarPlay and Android Auto, big screens with user-friendly infotainment systems, and cloud-powered virtual assistants will want a newer car that can match their pace of adoption. (If this is you but you need your new car to last a while, look for one that’s equipped for over-the-air updates so it has a chance of staying modern for longer.)
What is depreciation?
Depreciation is the amount of value a car loses over time. A car is a depreciating asset, meaning it’s worth the most when it’s new. The largest drop in value you’ll see in a car is the moment it’s driven off the dealership lot. From that point, a car will continue to lose value right up until it’s no longer serviceable, though the curve levels out over time.
Because of this, depreciation is one of the most significant costs of buying a new car. When you buy a new car, you’re the one who pays for that initial loss in value. If you love the car and you’re planning to drive it for a long time, and if the factors listed above make a new car a good value for you, then you may consider this expense worthwhile. However, some people are extremely motivated to buy used cars because they don’t want to pay the initial depreciation costs. This is a highly personal decision.
What is negative equity?
One more factor relating to depreciation is a concept called negative equity. Let’s go back to our brand new $40,000 SUV. You’ve financed it for $40,000 and driven it home. Now that it’s no longer new, it’s not worth $40,000 anymore. It’s worth whatever the used car market will pay for it. That may be 10% less, or 15%, or an even bigger difference, depending on the model. (For a brief insane period during the COVID-19 pandemic, you could get more for a used car than what you paid for it new. Those days are now firmly behind us.)
At this point, you can’t sell your SUV for a high enough price to pay off your loan. This means you’re in negative equity: you owe more on your vehicle than what it’s worth. You can get out of negative equity eventually, but it takes years of diligent payments to reach the point where your car’s value matches your loan balance. This can happen faster with certain brands that tend to hold their value better than others. For example, luxury cars typically depreciate more steeply than mainstream brands, especially those with a good reputation for reliability.
We’ll revisit this concept in more detail in the Financing section of this How to Buy a Car guide. For now, know that longer financing terms lead to longer periods of negative equity. If you need an eight or nine-year financing term to pay off your new SUV of choice but you could pay off a similar used SUV in four years, you’ll save money and have a lot more freedom with the latter option.
Why choose a used car over a new car?
Most people who choose a used car over a new car do so because they’re hoping to save money. In many cases, this is how things pan out. Used cars cost less, partially because buyers don’t have to shoulder the initial depreciation costs. However, it’s important to ensure you’re calculating your potential savings correctly and weighing them against the risks that come with used car ownership.
What are the risks of used car ownership? Even if a car’s warranty is transferrable, the new owner who takes it over receives a shorter warranty period. In many cases, a used car may come with no warranty at all. Used car buyers must therefore be prepared to take on the more frequent, costly, and unpredictable expenses that arise with older vehicles no longer covered under warranty.
This becomes even more risky if the car was poorly maintained by its original owner. It’s extremely important to research a used car thoroughly before buying. We’ll cover this in more detail in the Evaluating the History of a Used Car section of this guide.
Here are some of the reasons to buy a used car.
1. You’re looking for a lower up-front cost
Maybe you ran the calculations above and found that a lower up-front cost makes more sense with today’s financing rates. Perhaps you’ve got enough money saved up that you can afford to buy a car outright without financing, as long as it’s within a set budget. (This is an extremely smart move if you can swing it.) Or it could be that you just don’t want to be the one holding the bag on depreciation. Whatever the reason, unless you’re diving into the realm of rare classics, you’ll almost always pay less for a used vehicle than an equivalent new one.
An important point: all vehicle purchases, new or used, are subject to sales taxes. When you pay less up front, your sales tax will be lower. Depending on the price difference and the tax rate in your part of Canada, this difference can be significant. Paying less sales tax contributes to a used car’s lower up-front cost.
2. You want to get more car for less money
If you don’t have a specific type of vehicle in mind, consider this: With a $25,000 budget, you may be able to afford a well-featured five-year-old mid-size SUV, while that amount may only get you a base-model subcompact SUV on the new car market. Even when you’re comparing the exact same vehicle, buying used may mean you can get a higher trim in a three-year-old SUV than in a brand new one, which gives you access to better features.
3. You can budget for more frequent visits to the shop
Once a vehicle’s warranty expires, all repair costs are fully on you. For many buyers, the money saved by buying used is worth this lack of predictability. But you’ll need to have more money put away for unexpected expenses and ensure your budget can handle them. If you’ve got a garage and are skilled enough to take on some of the upkeep yourself, that makes the value proposition much clearer.
4. You’re cool with doing a lot of research
Buying a used car is more complicated than buying a new car. You’ll need to know what problems to look for, check the car’s history, get it looked over by a mechanic you trust, and review maintenance records. (Don’t worry: we’ll walk you through all of this in the Evaluating the History of a Used Car section of this guide.) If you’re willing to do this extra legwork, then a used car can save you a lot of money. But if you’re inclined to gloss over any of this, it might burn you down the road.
5. You’ll likely pay lower insurance costs
Generally speaking, it costs less to insure an older car than a new one. This is because newer cars are more desirable to thieves. Insurance costs change based on where you live and the vehicle in question, so there’s no universal way to calculate this. (In fact, a three-year-old model that’s frequently stolen may cost you more to insure than a brand-new car that criminals don’t want.) If you have a few models in mind, it’s worth giving your insurer a call to run some hypothetical scenarios. In most cases, you’ll find choosing a used vehicle saves you money on your car insurance. Your agent might even be able to give you tips for features to seek out that will net you an insurance discount.
6. Modern cars last longer
Your parents may tell you buying an eight-year-old car is crazy because it’s on the verge of heading for the wreckers. That might be true depending on the car, but it’s not as universally true as it used to be. Today’s cars are a lot more reliable than those of yesteryear, and many of them last longer, too. Buying a used car that you can drive into the ground is a longer-term scenario than it was 20 years ago. We can thank improved build quality, better lubricants, and advancements in rustproofing for that!
And now, just as you think you’ve made up your mind about whether new or used is right for you, we’ve got one more option for you to consider.
What is a Certified Pre-Owned vehicle?
A Certified Pre-Owned vehicle (or CPO vehicle) is a used vehicle that comes with added guarantees from its manufacturer. If a dealership acquires a used vehicle in good condition from the same brand it sells, it may choose to have its service team perform a qualifying inspection. If repairs are required, they’ll be completed by brand-certified technicians with approved parts. Once the vehicle meets the inspection standards set by the automaker, it can be certified under the brand’s CPO program. This allows the dealership to sell it with unique benefits, which may include an extended warranty and/or roadside assistance, lower lease or financing rates, service perks, or other benefits.
To qualify for automaker CPO programs, a vehicle usually must be within a prescribed age range, have less than a certain number of kilometres on the odometer, and have a clean history. One common benefit of CPO vehicles is an exchange guarantee, where a dissatisfied owner can exchange the vehicle for any other CPO vehicle on the lot at no cost apart from the price difference.
Note that most automakers operate CPO programs in Canada, but not all of them do. Your background checks on a CPO vehicle should be as thorough as on any used vehicle. Be sure to check whether the CPO program is administered at the dealer or automaker level, and review the coverage and benefits in detail to decide whether you’re really getting a great deal.
Move on to Section 2: Types of cars.
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