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Question:


I’m in the market for a vehicle. What's the most practical financial strategy: buy the vehicle new or used? Also, as I endeavor to be practical, what should be the maximum term for a car loan?
-JoanWillard


Answer:


Under ordinary circumstances, buying a used car or truck – a year or two old – is often the best way to go because the rate at which the cost of a vehicle declines tends to be most steep in the first couple of years and then levels off. A two-year-old car might go for half the price of a new car, even though it has a useful life of six or seven years or more.
 
The problem now is that new cars are in short supply for various reasons, including the earthquake and tsunami in Japan, which caused production to be curtailed, and the fact that demand is high from consumers who put off buying during the recession. This development has led to dealers reducing or eliminating the traditional buyer’s incentives, and that has had the knock-on effect of sharply raising prices for many used cars. The most prudent course of action may be to put off buying any vehicle until supply and demand balance out again or even work in your favor.
 
As for the right term for a car loan, you certainly don’t want to owe money on something after it has fallen apart or after you’ve sold it. How about this: Calculate the average length of time that you’ve owned cars for the last decade or so and plan on borrowing for one year less on your next one. If that will mean making payments that are more than you can afford each month, then you should consider holding off on your purchase – not a bad idea, anyway, given the realities of the car market mentioned above – and saving up a bigger down payment.
-Conrad de Aenlle



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