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New car prices hit a record high, but here's an easy way to save $7,000 on your next buy

Determine how much money you can realistically afford to spend.

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Drivers face a lot of decisions when buying a car, but choosing between purchasing their next vehicle brand new or slightly used is one that may have the biggest financial impact.

The average 1-year-old used car costs a striking 17% less than its new version, according to data from iSeeCars.com. Since the typical price for a new vehicle in the United States was $40,857 in January 2021, that means the used version could cost almost $7,000 less.

To find which car models have the largest gap between the newest and 1-year-old pre-owned version, iSeeCars researchers analyzed asking prices for more than 2.6 million cars sold from August 2020 to March 2021. New cars in the analysis were from model years 2020 and 2021, and used cars were from 2019 and 2020. The difference in cost between new and pre-owned was expressed as a percentage and ranked.

The takeaway: Some new car models may not be worth buying new right now considering that you could save over $10,000 — and in one case over $20,000 — by going with a lightly used model that's just one year older.

Based on those calculations, here are the top five car models that tend to be better to buy used than new:

BMW 5 Series

Percentage difference from new: 36.4%   
Price difference from new: $24,207

Hyundai Sonata

Percentage difference from new: 36.1%   
Price difference from new:
$9,898

INFINITI Q50

Percentage difference from new: 34.9%   
Price difference from new:
$16,322

Mitsubishi Eclipse Cross

Percentage difference from new: 31.6%   
Price difference from new:
$8,041

Ford Mustang

Percentage difference from new: 31%      
Price difference from new:
$13,422

New car prices hit record high during Covid

It makes sense that some drivers want to opt for a slightly older version of a car instead of the most recent model itself. New car prices have hit an all-time high even during the pandemic, according to Kelley Blue Book, rising $2,110, or 5.45%, from January 2020 to January 2021.

The price of used cars varies greatly, on the other hand, and buying used is typically a smart way to save money. But prices have been climbing: "While used vehicles, particularly certified pre-owned units with factory-backed warranties, represent a good buy over a new vehicle, prices on average are higher than they were a year ago," says Matt DeLorenzo, the senior managing editor at Kelley Blue Book.

"Buyers are facing a situation where production disruptions are limiting inventories and customer choice," he says. "Last year, it was shutdowns related to Covid, this year it's a shortage of microchips. With lower inventories, you'll find fewer incentives and higher prices."

Used-car sellers are still seeing slowdowns in sales because of the pandemic. In particular, short supply has led to higher prices for in-demand vehicles like pickup trucks, according to iSeeCars.

How to decide: Buy a new car or go used?

If you are in the market for a car but aren't sure whether to go new or pre-owned, think about your bottom line. Choosing the best route for you will ultimately come down to your lifestyle, how you handle money, and your budget.

"While buying used typically provides upfront cost savings, sometimes used vehicles only offer minimal savings compared to buying new," iSeeCars Executive Analyst Karl Brauer said in the survey. For example, a new car might still be under warranty, and you don't have to worry about a vehicle's accident or maintenance history.

"New cars aren't subjected to the wear and tear of some lightly used cars," he adds, "so the extra cost might be worth the added peace of mind."

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Buying used, however, can allow drivers to get "higher quality or better-equipped vehicles that may otherwise be out of their price range," he said.

It makes sense to determine how much you can realistically afford before you visit the dealership. Keep in mind that unless you can buy a new car outright with cash, you will likely need an auto loan. And if you can only afford the monthly payments of a longer loan term, you may want to consider a more affordable vehicle or looking at a used model rather than new.

A long loan term means you'll ultimately pay more for the car and could easily end up owing more than the car is worth. Recent Edmunds data shows that the average car loan is about 72 months, but experts say a shorter term is better.

"I do not recommend anything longer than a five-year loan or a three-year lease," Lauren Fix, a sector analyst at auto news and education website Car Coach Reports, recently told Grow. "After that, you're leaving money on the table and it's a bad financial move."

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Auto websites such as Edmunds and KBB can help you crunch the specific numbers, compare the financial differences between vehicles, and figure out the most cost-effective way to buy based on your needs.

You can also check the manufacturer's website. "Be sure to put in your ZIP code to learn about all the incentives that are available to you," DeLorenzo adds. "Many of these programs are regional. There are specific incentives available to first responders, recent graduates, military, veterans, and even Uber/Lyft drivers.

Those deals can take thousands of dollars off the price of your next car, he says: "But you first have to do the homework."

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