There is now a $20,000 price gap between new and used cars in America — the largest on record. But here’s a warning before you try to take advantage

The lure of used

Several market forces are sending used car prices south.

Surging inflation in 2022, driven in part by skyrocketing car prices, has squeezed budgets. While inflation has cooled somewhat, used car prices have dropped 6.2% from the same period last year. Edmunds says this decline is partly due to an increased supply of new vehicles. It’s possible high interest-rate loans on used cars are also keeping buyers at bay, keeping inventories up and prices down.

The savings can be substantial. For example, the MSRP of a new 2024 Toyota RAV4 LE in late November 2024 was $30,025, according to Edmunds. The average “fair purchase price” of the 2021 version is about $23,700, according to Kelly Blue Book.

Discover how a simple decision today could lead to an extra $1.3 million in retirement

Learn how you can set yourself up for a more prosperous future by exploring why so many people who work with financial advisors retire with more wealth.

Discover the full story and see how you could be on the path to an extra $1.3 million in retirement.

Read More

Hidden costs

For some, that’s a bargain. But if you’re hunting for a replacement vehicle after being on the sidelines for a few years, you’re in for some new sticker shock. Edmunds says used prices are still up more than 31% over the last five years.

And while the initial price tag might beat the current model year, the overall cost of owning a used car can rival the cost of new.

Though reliability among some manufacturers is challenging the old notion of avoiding used cars with 100,000 miles, it’s still true that older cars with more miles carry risk. Unexpected breakdowns, worn-out parts, and the general wear and tear of previous ownership can lead to hefty repair bills.

While new cars carry that hefty sticker price and depreciate quickly, they offer some advantages.

New cars come with manufacturer warranties that cover most repairs for a certain period or mileage, offering peace of mind and saving you money on major repairs. New vehicles are less likely to break down, saving you the hassle and expense of unexpected repairs.

Fuel efficiency is typically increased, with newer models often having better fuel economy than older cars, saving you money at the pump. And of course, new vehicles are equipped with the latest technology and safety features that enhance the driving experience.

Making the right choice

Choosing between a new and used car requires careful consideration of your personal circumstances and priorities. Start by honestly assessing your budget.

Don't just focus on the sticker price; factor in estimated costs for insurance, maintenance and repairs. Experian notes that “while it's typically cheaper to insure used cars than new ones, that's not always the case, as age is merely one factor determining your insurance premiums.The make and model of your vehicle also play a large role in your insurance costs.”

Your risk tolerance is also important. Are you prepared for the possibility of unexpected repair costs that come with a used car, or do you prefer the warranty security of a new car that may also cost substantially more?

Smart buyers will analyze a make’s history, obtain maintenance records, and be alert for any red flags. A pre-purchase inspection from a trusted mechanic can provide valuable peace of mind.

Finally, don't settle for the first financing option you come across.Shop around and compare interest rates and loan terms from various lenders to secure the best deal. By taking these steps and thoughtfully evaluating your needs, you can confidently choose the car that best aligns with your lifestyle and financial situation.