Should I buy a brand-new or a second-hand car?

Question: On buying a car, they say that you’ll lose money on depreciation when you buy a brand-new car while others say maintenance for a second-hand unit is more expensive. All things being equal, should I buy a brand-new car or a second-hand one?—Jerome Bautista via Facebook

Answer: At first glance, it will seem that buying a pre-owned unit is more financially wise. Cars depreciate because they are used a lot and that can be a disadvantage to you, financially speaking.

But things are not always what they seem, so let’s use real numbers so that we can come up with a more logical conclusion.

Let’s say that you are looking at a Toyota Innova. A brand-new Toyota Innova E Diesel currently costs P992,000 and according to listings of the same variant on the Internet, pre-owned ones cost between P720,000 and P770,000.

Let’s use the median of P745,000 as our price for a pre-owned unit.

From this perspective, it does make sense to go for a three-year-old unit because it will save you P247,000. But there are many other issues to be considered.

The pre-owned unit is assumed to be in good working condition and that it should not have been submerged in any of the floods we have experienced since 2011, otherwise you will be buying a car that will be a headache and very costly to maintain. Access to a good mechanic and maintenance records can help you determine the roadworthiness of the unit.

If you are paying in cash and assuming that the pre-owned unit is in a very good condition, the savings of P247,000 is a good enough reason to buy a pre-owned unit.

What if you plan to purchase the unit via an auto-loan facility, will the recommendations change?

I was able to check with a leading bank the prevailing interest rates for brand-new cars and then a car dealer for rates on pre-owned units.

According to the bank, the add-on rate for a brand-new unit is 14.59 percent (for bank clients) and the dealer’s offer for pre-owned vehicles was 35 percent.

Rates for brand-new units are much better than those for pre-owned units.

With a 30-percent down payment and a term of 36 months (three years), the monthly amortization for the brand-new unit will be P22,103.14.

On the other hand, the monthly amortization for a pre-owned variant will be P19,556.25, or a P2,546.89 difference per month.

Under this scenario, I would think twice about getting a pre-owned unit because of the small difference in the monthly amortization.

Undoubtedly, a brand-new unit will be less of a potential headache over time. A three-year-old car may require a new set of tires, which can cost you an additional P12,000 to P16,000; a new battery which is about P5,000, on top of other parts that need to be replaced.

Still, the P2,546.89 monthly difference can still be sizeable in three years.

So what are my recommendations?

If you are buying the unit in cash, then a pre-owned unit makes more financial sense.

If you are buying it through an auto-loan facility, you can go for either one, but I will personally go with a brand-new one since I don’t want to risk the problems associated with a pre-owned unit unless I get substantially big savings … but that’s just me.

I would like to advise, however, that not all decisions can be based on a cost-benefit analysis.

If buying a car is an important need and the car is a tool of the trade that will make your daily life more convenient, or even allow you to earn more income, then go buy a new car.

The bigger issue is whether you have the budget for one. If by buying the car, you will not be able to finance other needs, be forced to cut down on basic necessities or be prevented from achieving more important goals, then I would strongly suggest that you defer your decision until you have enough funds.

(Randell Tiongson is a personal finance columnist, author, speaker & radio show host. Visit his site at www.randelltiongson.com or follow him at Facebook, Twitter and Instagram. To learn more about financial planning, attend our free personal finance talk on Jan. 23, 7p.m. at PSE Ortigas. To reserve, e-mail at [email protected] or text <name><e-mail><RFPinfo> at 0917-3464126.)