If you're planning to buy a new car, you must have heard of the latest trend of car manufacturers offering interest free car loans with a 5 year term. It is marketed as an incentive by manufacturers to get buyers to buy a new car.
However, you must compare buying a new car on an interest free loan with buying a used car on a loan that carries some interest. The interest free loan obviously looks like a better option. However, it does not mean that it is the cheapest or the best option for you. You also need to consider various other factors that matter when buying a car. One of those factors is the rate of depreciation of a car.
Money You Lose When You Buy a New Car
The first thing you need to realize is that a car is a depreciating asset. For most people, buying a car is an investment due to its large purchase price. However, a true investment should provide some return and a new car does not give you good return. The depreciation rate of a new car averages 15 to 25% annually which means it will lose around 60% of its purchase price in the first 5 years of ownership. If you're trying to reduce debt or build up your net worth, you wouldn't want to spend a lot of money on an asset that depreciates so much in value.
Buying a Used Car – Interest Calculations on Loan
Consider purchasing a used car with a loan that carries interest. The first important thing is the lower purchase price of a used car. You will need to do your own calculations to arrive at the savings you will make when you buy a used car at a lower price as compared to buying a new car with a loan at zero interest.
To make things simple, let's take an example of buying a used car for £12,000. The 5 year loan carries an interest rate of 6%. You will have to pay £1919.62 as interest over the life of the loan. In fact, you might be eligible for a better deal when you shop around for loans. You can compare this number with the average depreciation of a new car which ranges from 15 - 25% annually in order to find the deal that’s best for you. It is likely that you will come ahead with buying a used car.
Other Tips for Buying a Used Car
If you still have doubts, here is a list of the best used cars you can buy in order to get the most value for your money. It is recommended to take your time when buying a used car. It is important to carefully check the vehicle’s VIN as well as its history to avoid making an expensive mistake.
You also need to consider the fact that the depreciation in value of a car happens much quicker in the first 3 years and then the depreciation rates slows down in the 4th and 5th year. Simply put, the car will keep depreciating in value but the rate of depreciation will slow down. This is why, when you are looking to buy a used car, it is better to buy a 5 year old used car in order to get the best value for your money. A 5-year-old used car has already lost the bulk of its value. It shouldn’t be a problem to find a used car that is safe, affordable and offers excellent value for your money for leisure, pleasure, commuting or work..
Used Car with a Loan or a New Car with an Interest Free Loan – Which Is Better
If you look strictly in terms of value, you will find that buying a used car with a low interest car loan delivers better value than buying a new car with an interest free loan. In fact, you're going to lose more money if you replace your old car with a completely new one. You should also know that used cars also come with warranties and are reliable.
Buying a completely new car is tempting, especially when you are buying your first car or you had to spend a lot of money on repairs for your old car. However, when you do the research and the math, you'll find that buying a used car offers the best value for your money.