Buying a car isn’t like buying a pair of shoes; you don’t just pick one out, try it on, and drive away. There are dozens of small decisions that you’ll need to make. How big of a vehicle do I want? Gas, electric, or hybrid? What colour? Buy it, finance it, or lease it?
But chief among these decisions: Should I buy a new or used car?
In this guide, we’ll cover the pros and cons of used and new vehicles, plus the car insurance implications of each.
The sale price of used vehicles has increased dramatically since 2020. Nevertheless, used vehicles can still offer great value compared to their new counterparts — at least for drivers who can navigate the pitfalls of purchasing used.
The main (perhaps the only) reason that people buy used cars is the lower price tag.
The reason for the lower cost is mainly depreciation. Put simply, depreciation is a reduction in value of an item as the years of its life tick by. But cars don’t depreciate at a steady rate. We’ve all heard the adage that a new car loses half its value as soon as you drive it off the lot. That’s not quite true, but vehicles do lose about 20% of their value after one year, and 40–50% after five years.
When you buy a used car, you let the first owner take that big depreciation hit.
Closely related to depreciation is the car’s resale value. If you plan to sell your car after a few years, you should be able to sell it for much closer to the purchase price if you buy used. If you’re good at marketing, you might even make all your money back… but don’t count on it — cars continue to depreciate in value until the end of their life.
When you buy a model that’s been around for a while, you’ll be able to find all sorts of information online from people who’ve been driving it for years. That will help you identify common issues or complaints. If you buy a brand-new car, you won’t have any forewarning of potential defects or annoyances.
Older vehicles commonly cost less to insure compared to new vehicles.
There are many reasons for this, but it’s mainly because they simply aren’t worth as much. An insurance provider is agreeing to pay up to the vehicle’s actual cash value if it’s damaged; it makes sense that they’d charge less to insure a $2,000 ’95 model than a $60,000 ’23 model. Plus, cheap replacement parts for old, common models are usually widely available, reducing potential repair costs. New vehicles are full of cameras, sensors, and other electronics, making even routine cosmetic repairs pricier.
Car insurance premiums are calculated based on many, many factors, so old cars aren’t always cheaper. But that’s certainly the trend.
The major downside to buying a used car is reliability.
When you buy a new car, you know it hasn’t faced much beyond a trip from the factory to the dealership via rail or truck. But when you buy a used car, you’ll never be quite sure how the previous owners have treated it. The odometer tells you how far it’s travelled, but nothing about how the owners used it or maintained it. A well-cared-for car with 250,000 kilometres on it could be in better shape than a car with 100,000 if the latter never had its oil changed. With a used car, you may save money up front only to have a $5,000 repair pop up a few weeks later.
You can mitigate this somewhat by getting a pre-purchase inspection and vehicle history report. These reports contain information such as how many registered owners the vehicle has had previously, its insurance claim history, or whether it’s been reported stolen. Not every report contains all this information. You can request history reports from CARFAX Canada, or from provincial organizations like ICBC or ServiceOntario.
History reports won’t tell you everything (particularly about maintenance), but they’ll help dredge up serious red flags like major collisions or water damage.
Buying used means you get what you get — there are only going to be so many used vehicles in your area and price range. With a new car, you’ve got your choice of colours and features. When you buy a used vehicle, on the other hand, you’ll usually have to compromise.
Buying used from a dealer will help with the selection, but you still won’t have the customization options available when you buy new.
If you’re buying your vehicle outright with cash, you’ve got nothing to worry about here. But, if you’re planning to finance your car purchase, you may find that used vehicle loans come with higher interest rates. That’s mainly because lenders, who use the vehicle as collateral, have a harder time pinning down the value of a used vehicle.
Of course, a higher interest rate may not matter if your loan is half the size it would be with a new car. You’ll usually still end up paying a smaller total with a used vehicle.
Additionally, lenders may only offer shorter loan terms for a used car, compared to the eight-years-or-more loans available for new vehicles. Lenders want to make sure the used car doesn’t depreciate faster than the owner can pay off the loan. All else equal, this can increase the amount of the monthly payment compared to a longer-term loan with the same principal balance.
When you buy a new vehicle, it comes with a broad manufacturer warranty. If there are any defects, you shouldn’t have to pay to have them repaired. If you buy a used vehicle that’s relatively new, the manufacturer’s warranty may still be valid. They’re usually good for 3–5 years or 60–100,000 kilometres (whichever comes first).
But if your used car is older, your options following a breakdown are fewer.
If you buy used from a dealership, you may have some luck depending on the circumstances. Car dealers do have certain responsibilities, particularly that their vehicles need to be of merchantable quality. Basically, that means the cars should be free of hidden defects and continue to function for a reasonable length of time. If you bought a used car that broke down much sooner than you think is reasonable, you may be able to reach an agreement with the dealer, or pursue a complaint with the appropriate authority in your province (like OMVIC in Ontario or AMVIC in Alberta). However, there’s no guarantee of success and there will probably be a lengthy legal dispute before you reach any resolution.
If you buy used from an individual, their responsibilities are slightly less, though they still aren’t allowed to misrepresent the vehicle’s condition. If you think the seller misled you, you may be able to have them pay for the repairs, or take back the vehicle. Your first step would be speaking to them, followed by a demand letter, followed by legal action.
Basically, buying used carries certain risks — there’s almost no way around this downside.
There is one in-between option, however: buying a certified pre-owned vehicle. These vehicles are sold through manufacturer programs, and undergo more rigorous inspections before they’re resold. They also come with the sort of warranty you’d get with a new vehicle. While certified pre-owned may be more expensive than buying used through a private sale, it’s cheaper than a brand-new vehicle.
A lien is a legal claim that a lender has to a piece of property, when the owner of that property still owes them a debt.
For example, if you take out a loan to buy a car, the lender will have a lien on the car as collateral for the loan. When the debt is repaid, the lien disappears. If the debt isn’t repaid, the lender has the right to repossess the vehicle.
A lien is attached to the vehicle, not the owner. If you purchase a used car with a lien against it, you’ll inherit that lien. If you don’t know about it, that could be a problem, as the lender would still have the right to repossess the vehicle if the loan isn’t repaid.
Before you purchase a used vehicle, you can check whether there are any liens against it. This information appears in a CARFAX report, or through a provincial or territorial property search. For example, in Ontario, you can search online. In Alberta, you can find a local registry agent to do the search. You’ll need the vehicle’s VIN to search for any liens against it.
If you’re interested in purchasing a vehicle that has a lien against it, you should have the owner pay off that lien first. Additionally, get proof in writing from the lender that the lien has been removed.
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Compared to buying used, buying a new car is much more straightforward. Nevertheless, there are a few things to keep in mind.
The first pro is the big one: buying a new car is just easier. You know it’s in good condition, and if it’s not, defects will be covered by the manufacturer’s warranty.
You don’t need to set up meetings with a bunch of private sellers. If you know what make you want, it’s as easy as showing up to the dealership and talking with a salesperson.
When you buy new, you can pick and choose from models, trim levels, add-on features, colours, and everything else. If you’re picky about the specific features of your car, buying new is the way to go.
Furthermore, new vehicles have the most up-to-date technology. You can buy a used late-model vehicle with fancy bells and whistles, but a new vehicle will always have the latest tech. New models are also often more fuel efficient with lower emissions.
Plus, when you buy new, most of those high-tech features will have coverage under the manufacturer’s warranty for at least a few years.
When you buy a new car, you’ll benefit from lower interest rates if you need a loan to purchase the vehicle. You’ll also get access to dealer and manufacturer incentives, further reducing the cost of purchasing or financing the vehicle.
If you’ve got a great credit rating, some dealerships may even offer 0% financing — you’ll never get that from a bank.
The federal government and several provincial governments offer large rebates for consumers who purchase electric or plug-in hybrid vehicles. The federal incentive is only available for new vehicles. While some of the provinces offer rebates for buying a used electric car, the rebates are larger if you buy new.
When it comes to the downsides of buying a new car, the first one is obvious: it’s more expensive.
What’s more, the depreciation of a vehicle is front-loaded — it loses a big chunk of its value in the first couple years of ownership. As the buyer of a new vehicle, you absorb that drop in value yourself.
Speaking of more expensive, insuring a brand-new vehicle is often pricier than insuring an old one. It’s basically the opposite of insuring the used vehicles described above: since new vehicles have high cash values, the insurance provider is committing to spend more to repair or replace it following a loss.
You might also want to add a to the amount you paid for the vehicle (or the cost of a similar replacement) rather than the vehicle’s cash value.
This is important in the first months of new car ownership, where the cash value could be much less than the amount of your car loan. That’s crucial if the vehicle is totalled, as a write-off won’t eliminate your vehicle loan. If your vehicle is destroyed, you’re still on the hook for every outstanding penny.
When does a new car become an old car? According to Murphy’s law, your brand-new car is destined to get struck by a flying stone on the way home from the dealership.
Maybe your luck isn’t that bad, but even so, the sheen of a new car is fleeting. Keep that in mind as you decide whether the extra cost for that new car smell is worthwhile.
Vehicle manufacturers are increasingly experimenting with subscription-based revenue models. Some new cars require paid subscriptions to use built-in features, like BMW’s foray into heated seat subscriptions. Tesla also offers a host of subscription-based options, for example.
If you’re concerned that a manufacturer will charge you indefinitely for the fleeting comfort of a warm seat, an older model is more likely to leave control in your hands and not in the cloud.
Okay, you’ve read the pros and cons of new and used cars. Are you still on the fence? Here are a few questions to ask yourself as you consider your options:
When you’re shopping for a car, it’s easy to fixate on the purchase price and ignore all else. However, consider both the up-front and the ongoing costs of the vehicles you’re considering.
Ongoing costs include maintenance, insurance, gas, financing, and so on. Estimate what these costs might add up to for the vehicles you’re considering.
A rule of thumb to consider here is the 20/4/10 rule. This theory suggests that you should make a down payment of 20%, have a car loan no longer than four years, and keep your total car expenditures under 10% of your net income.
Do you need a new car for the duration, or do you just need a way to get around for one summer? Used cars are cheaper in the short-term, of course. If you only need the vehicle for a few months, you don’t need to worry as much about maintenance costs or impending breakdowns.
Conversely, if you want to buy a car once a decade, a new (or new-ish) vehicle may be more appropriate.
If you don’t care about what colour or features your car has, one of the key benefits of buying new isn’t really relevant. On the other hand, if you value reliability and predictability above all else, a new vehicle is probably the way to go.
Ultimately, you’ll have to decide what’s most important in your new vehicle and use that to weigh your decision.
To recap what we’ve covered already, new vehicles are often more expensive to insure than used vehicles. The main reasons for this are twofold: new vehicles usually have higher value, and repairs are often more expensive — both factors increase the cost of insurance claims.
However, insurance for new cars isn’t automatically more expensive. Several factors used in calculating car insurance premiums have nothing to do with the car itself, such as the driver’s history and where the vehicle is usually parked.
The type of vehicle matters too, as some makes are cheaper to repair (on average), while others are frequent theft targets. The Insurance Bureau of Canada publishes relative cost ratings for most makes and models. You can use this data to compare the relative cost of collision, comprehensive, or DCPD coverage for a vehicle you’re considering.
One other thing:
If you’ve leased or financed your car, the lender or lessor will require that you purchase comprehensive and collision coverage. Of course, both are good to have regardless. But, if you buy a vehicle outright, you’d have the option to decline these optional coverages to reduce your insurance costs if you wished. Buying a car without a loan is easier to do with a low-cost used car than a brand-new one.
The biggest drawback of buying a new vehicle is the cost. Both because the total price is generally higher, and because the vehicle’s value will depreciate significantly in the first few years of ownership. Additionally, insurance costs for new vehicles are often higher.
As an investment, vehicles are not what you want. A new vehicle loses as much as 20% of its value in the first year of ownership, and 40% after about five years. Unlike the potential of say, buying real estate, there’s virtually no chance of recouping the purchase cost when you sell a vehicle, particularly if you’ve purchased it new.
If you can afford it, there are benefits to buying a car outright rather than taking out a loan. For one, you won’t spend any money on interest. As well, you’ll have more flexibility in choosing optional insurance coverages like comprehensive or collision, which a lender would require you to buy.
One of the advantages of buying a used car is the lower cost, making it easier to buy the car outright.
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About the expert: Daniel Mirkovic
A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.
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