Currently many car companies are often five-year loans with interest free loans to encourage consumers to purchase new cars. But is purchasing a new car with an interest free loan a better choice than purchasing a used car with a loan with interest. Many people may think that the better option is the interest free one, since you do not have to pay interest to purchase the car.
However it is important to realize that a car is a depreciating asset. Many people consider cars an investment because of the large purchase price, but a true investment should bring you a rate of return for the money you spend, and a car will not. Generally speaking a car will lose anywhere from $1600.00 to $2500.00 dollars in the first year of ownership. Most cars will depreciate from between $6500.00 to $10,000.00 over the first five years of the life of the car.
If you realize that the car is going to depreciate in value over time, the next question is to look at how much interest you will be charge over the life of your loan to see if you will come out ahead by buying a used car at a lower purchase price. With the purchase price of $12,000.00 and an interest rate of six percent you will end up paying interest of about $1160.00 over the life of a three year loan.
It is also important to realize that the value of a car depreciates much more rapidly the first three years of the life of the car and begins to slow down by the time it is five years old. So although the car will continue to depreciate in value it will do so at a much lower rate.
Looking at the average numbers buying a three year old or a five year old car will save you money in the comparison of interest paid out ($1160.00) to the average cost of depreciation of the first year ($1600.00-$2500.00), which doesn’t take into account the further cost of depreciation over the next two or three years.
Although buying a new car with an interest free loan may seem like a good idea on the surface, you will still lose more money than if you were to buy a used car with a loan that has interest. If you can purchase your car with cash you will end up losing even more money in comparison with buying a new car. Additionally many used cars come with warranties and are still very reliable.