New cars vs. used cars. Read enough personal finance blogs and you’ll find that the truly frugal advocate for always buying used. But the truth is, the correct answer is a lot more nuanced than that, especially if you’re a high-net-worth individual, such as a physician.
Before we go any further, take a moment to revisit this car-buying guide for physicians. We at PhysicianSense advocate for following the 5% rule of car buying, which says that you should purchase a car that costs no more than 5% of your net worth. The principle that underscores this habit is as follows: Vehicles are one of the few depreciating assets that Americans are willing to finance.
Let’s explore that for a moment. Think about some of the other things you’ve gone into debt over at this point in your life: your house, your education, maybe your health. The house will likely gain value over time. Your education will produce wealth over your lifetime. Being healthy will enable you to be productive and consequently make money. But your car? Your car is guaranteed to deteriorate and become worth less. So, why are you paying interest on it again? We advocate for purchasing outright, not financing cars.
With the 5% rule in mind, let’s explore, compare and contrast buying new vs. buying used.
Buying new cars
If under the 5% rule you can afford a new car, it might be worth it for you to purchase one. Here are a few of the reasons why.
Let’s be real: Nobody brags about their used car. Everybody says “new car.” If having the status that comes along with the new car smell is worth it to you, and you can afford to buy one outright using the 5% rule, then go for it. Just remember, as soon as you drive the car off the lot, it’s worth about 20% less than you paid for it.
This is one of the biggest reasons to go new. New cars tend to be more reliable than their used counterparts. Fewer miles and no previous owner mean that they’re more likely to perform as intended. Additionally, most new cars come with substantial warranties that will cover you in the event of a mechanical failure. Maybe this peace of mind is worth it for you.
Ease of purchase
Generally, it’s easier to buy a new car. You don’t have to deal with title transfers, for one. You won’t have to worry about getting an independent inspection from a mechanic, or pay for a Carfax report, either. Also, you have more options when purchasing a new car. If the dealer doesn’t have the color and trim level you want, they can order it for you.
Gadgets and technology
New cars have the latest safety and comfort technology. Perhaps you’re an emergency physician who’s seen enough motor vehicle accident patients to last a lifetime. Especially if you have children, having the safest vehicle possible might be a priority for you. Additionally, new cars have improved mobile technology integration. This might be important to you if you’re in your car a lot.
Should you buy a new car?
To the editorial team at PhysicianSense, this boils down to dollars and sense. If you apply the 5% rule and can buy a new car outright (i.e., without financing), then it might be worth it for you to do so. Here’s why.
- The road is a dangerous place. If you’re an emergency physician, you’ve seen enough traffic fatalities and injuries. If you can afford the latest and greatest safety technology that might save you from somebody else’s reckless driving, it’s worth it. After all, your ability to practice is your greatest asset. If you’re injured in an accident and you can’t practice, your income will take a hit and your family will suffer.
- If you’re a doctor who is often on call, you need a reliable ride. A new car will likely be more reliable than used.
- If having a new car is important to you and you can afford it, not having a new car might eat at you. Being a doctor is hard enough as it is. It might be worth it to give yourself this luxury.
The used car-buying experience isn’t what it used to be. As vehicle technology has improved, so has the durability of car parts, lowering your chances of bringing home a clunker. Buying used has more advantages than ever before.
You should send a thank-you note to the previous owner for taking the bigger depreciation hit. Most vehicle value depreciation takes place in the first three years, where 30% of the total value can be lost. By purchasing a 3-year-old vehicle, you’re saving some serious cash. For example, a 2019 Subaru Forester has an MSRP of $24,295. Edmunds estimates that a 2016 Forester in clean condition is worth about $16,000.
Certified Pre-Owned Options (CPO)
Buying a used vehicle also gives you the option of purchasing a CPO car. While you’ll pay more than the average cost of a used vehicle, you’re getting some of the peace of mind you would get by purchasing a new vehicle. Many CPO vehicles are lease returns that have adhered to strict maintenance schedules and mileage limits. They usually have one owner and haven’t been in any accidents. Also, CPO vehicles tend to come with some warranty coverage.
Depending on how things shake out under the 5% rule, you might be able to score a great deal on a luxury car by buying used. Just keep in mind that this might prove costly in the long run. Maintenance on luxury or import vehicles tends to be more expensive.
Vehicle track record
This is another example of a situation in which you might want to send new car buyers a thank-you note. By buying used, you already know what cars are lemons and can avoid them. You’re also less likely to end up with a vehicle you can’t get rid of later.
Cheaper to insure
Because used cars are worth less, they’re also less expensive to insure. As the value diminishes over time, it might make sense to remove collision coverage if you can afford to replace the vehicle. This presents another cost savings you likely won’t encounter with a new car.
Should you buy a used car?
If you can’t purchase a new car using the 5% rule, then we don’t think you should. Stick with used. Here’s why.
- Two words: Student loans. You’re in enough debt. Don’t add to it by financing a new car.
- A car is better than no car. It will be highly inconvenient, if not impossible, to be a doctor without a car, unless you’re working in a city.
New cars are:
- Status symbols
- Generally more reliable
- Easier to buy
- Generally safer and come with the latest technology
Used cars are:
- Less subject to depreciation
- Available in certified pre-owned options
- More affordable
- Less likely to be lemons (you know which models to avoid)
- Less expensive to insure
Should you buy new? Yes, if you can afford a new car under the 5% rule (i.e. buy one without financing), then you should. A doctor needs a reliable ride. Should you buy used? Yes, if you can’t purchase a new car in cash, you should buy used. Do not add to your debt.