My dad once told me, “Son, avoid buying a new car for as long as you can. The moment you drive it off the lot, it’s worth half what you paid for it…and it only gets worse. You gotta put gas in it, pay for insurance, oil changes, and tires too.”
Half what you paid. It was shocking. But was it true?
As it turns out, dad wasn’t wrong. Not entirely at least. It won’t be worth half, but it does lose value.
He also gave me a few other tidbits of knowledge that I had questioned – as you do when you grow up and wonder how wise your dad really was. He said, “If you do make the terrible decision to buy a car…then buy a 3-year-old certified used car with some warranty left from the dealership.”
This article is going to test a lot of Dad’s wisdom by asking these two questions:
Should I buy a new or used car? What’s the real cost of a car in Canada?
The age-old question: New vs. used
This is the question that almost everyone considers at least once in their lives.
A lot of old knowledge tells us that we should buy used. Autotrader even makes this statement:
“Used cars cost less than new cars, all else being equal.”
But that view is a bit short-sighted. There’s a lot more to consider.
Of course, on the surface, they’re right. An older car will have a lower cost at the outset. But there’s more to it than that.
Then there’s your own driving style
At this point, it seems a bit confusing and complicated. That’s because it is. Why?
Because we – as people – are more complicated than that. There are more questions that need to be asked about you and how you drive.
- Do you drive your vehicles into the ground?
- Do you want a new one every few years?
- Do you love to drive?
- Do you want your butt to be the only butt to have ever been in the seat, and all the memories in that car to be your memories?
- Do you have the time and know-how to repair your own car?
- Do you want no-worries when it comes to repairs?
Each of those questions will guide you to a better decision for you and your next car, whether new or used.
Related: 6 Alternatives to Owning a Car
The initial price
Assume it’s your first car and you’re looking for a small to midsize car, something that will keep its value (relatively speaking).
You haven’t decided whether or not you’ll resell it in a few years or drive it into the dust. One last assumption, you’re looking in the GTA (Greater Toronto Area).
A Toyota Corolla is a good starter car. We’ll use the 2020 model at $23,591 + taxes, freight, & fees.
Compare it to Dad’s trusty 3-year-old 2017, with 63,455 km and a price of $18,900 + taxes.
The upfront cost comparison
It’s a simple comparison with an obvious result: used cars cost less.
If you want to save on the initial price, the used car in our comparison will cost at least $4,700 less. And this is without considering taxes, fees, freight charges, and any other upsells the dealer sticks you with.
Winner: Used
Car depreciation
Since we’re talking about cars retaining their value, let’s discuss depreciation.
What is it?
Put simply, depreciation is the amount of value your car loses over time. The moment your new car is yours, it’s no longer new. It isn’t worth as much as it was sitting on the lot ownerless and driverless.
It represents how much of the car’s value is lost from use.
There are a lot of different estimations of exactly how much value cars lose per year. This section uses the general rules of thumb Carfax outlines in this article.
How big a deal is it?
Well, it depends on how long you plan on owning the car for.
1 – 5 years
According to Carfax, your car depreciates 20% after you own it for 12 months. Then it’ll keep losing value at a rate of about 10% per year – so by the end of 5 years, you lost around 40% – 50% value.
Remember it doesn’t lose 10% of the original value each year – just 10% of the current value. The amount of depreciation lessens each year.
Here’s how those number looks over 10 years, using our new car as an example:
| Year | Value | Loss | Value left |
|---|---|---|---|
| Starting | $23,591 | 0% | 100.00% |
| Year 1 | $18,873 | 20% | 80.00% |
| Year 2 | $16,986 | 10% | 72.00% |
| Year 3 | $15,287 | 10% | 64.80% |
| Year 4 | $13,758 | 10% | 58.32% |
| Year 5 | $12,382 | 10% | 52.49% |
| Year 6 | $11,144 | 10% | 47.24% |
| Year 7 | $10,030 | 10% | 42.52% |
| Year 8 | $9,027 | 10% | 38.26% |
| Year 9 | $8,124 | 10% | 34.44% |
| Year 10 | $7,312 | 10% | 30.99% |
The 2020 Corolla would be worth $7,312 of its original $23,591 after 10 years. That’s a lot to lose.
6 – 10 years
From the 6-year mark on, depreciation tends to slow down.
Instead of losing thousands, your car will depreciate a few $100 each year. By year 10, the car will be worth around 30% of its original value.
For example, my wife and I traded our 9-year-old Dodge Journey with 240,000 km for about $2,500. At that age, and with that many kilometers, your average vehicle will be at a similar value. We were able to get 9 years of use and still use its remaining value toward a new car.
The depreciation comparison
Now that we have an idea of depreciation in general, let’s return to our Corolla comparison.
| Car | 2020 Corolla | 2017 Corolla |
|---|---|---|
| Initial value | $23,591 | $18,900 |
| Value at year 5 | $12,382 | $11,160 |
| Total loss | $11,209 (48%) | $7,740 (41%) |
If you want to sell it in 5 years, the 2020 Corolla will be worth around 48% less at somewhere in the neighbourhood of $12,382, a loss of about $11,209. The 2017 Corolla will be worth about $11,160, a loss of around $7,000. (Almost half…Dad was right!)
Still, you save $3,469 in depreciated value with the used 2017 Corolla.
The new Corolla
The new car will be the one taking the initial hit with depreciation. If you’re buying a new car, this is something you need to know.
According to Canstar‘s look at how the value of specific cars has depreciated, the new Corolla will depreciate 27% – 36% after 3 years.
This isn’t bad, considering the next best car for depreciation is the Mazda 3 at 31% – 39%, and they get worse from there.
But it’s still important you understand that buying a new car means you’re the one who pays the price for depreciation at the start. You won’t get that money back.
Dad said half its value – he was exaggerating. But maybe he wanted me to steer clear of new cas for a reason.
Related: Which Rust Proofing Service Is Best?
The used Corolla
The 2017 Corolla is priced at $18,900. That isn’t the “out-the-door” price either, but we’ll get to that. It’s of course always a good idea to haggle, but let’s assume you don’t and you leave with the list price.
Originally the 2017 Corolla sold for between $16,390 – $25,410. Today, it’s actually worth about $14,338. Taking the middle-ground starting price of $20,900, that’s a loss of 31.3% (looks like Canstar was right!).
The initial depreciation has happened and someone else took the loss. You don’t have to worry about that anymore.
Once the car is in your possession, you can expect your used Corolla to depreciate by about 10% each year after that. At about year 10, it’ll be worth about $6,590.
Does it really matter to me?
In the end, it’s up to you. Some people want the new car – it has warranty and it’s reliable. That might be worth $3,469 to you.
If you feel safe with a certified used car with some warranty left on it (about 50,000 km powertrain warranty), then you might feel like taking advantage of the difference in depreciation.
Remember, you also save about $4,800 on the initial outright cost.
Me? I’m taking the used car at this point!
Extended warranty? Might be a good idea
If you take the used car option, there are optional extended warranties that you can purchase.
For example, the Toyota dealership I asked offers them anywhere from an additional 3 – 7 years, at prices from around $800 – $3,500. So you could take a 7-year warranty for peace of mind on the used car and still be about even on the initial cost.
Winner: Used
The insurance price difference
The comparison between new and used gets fairly simple when it comes to auto insurance. New cars cost more to insure since they cost more to replace and they’re more likely to get stolen.
You’ll spend less insuring the used 2017 Corolla than the 2020 model. How much less? That’s a complex question.
Why? Again, we’re complex people.
What’s your driving record like? How long have you had your license? How long have you been insured? There are too many questions to answer. But there are some basic rules.
For the sake of this article, we’ll go with The Zebra‘s estimations:
“Your auto insurance rate will drop by 3.4% for every year your vehicle ages. Meaning, an 8-year-old vehicle is about 25% cheaper to insure than a brand new vehicle.”
This is an American estimation, but it’s generally true in Canada too.
Say you had the estimated average insurance cost of Ontario (which is $1,920/year according to Insureye), we can estimate that auto insurance for our 2017 Corolla will cost 10% less than the 2020 at the outset. In real numbers, that’s a difference of $189 per year.
Here’s how the numbers would look over 5 years:
| Year | New cost | Used cost |
|---|---|---|
| 1 | $1,920 | $1,731 |
| 2 | $1,855 | $1,672 |
| 3 | $1,792 | $1,615 |
| 4 | $1,731 | $1,560 |
| 5 | $1,672 | $1,507 |
| Total cost over 5 years | $8,969 | $8,085 |
Winner: Used
Maintenance costs
This seems fairly simple. A new car will have warranty. Any major repairs will be covered.
Plus, generally, a new car shouldn’t need repairs. That’s the point: peace of mind. It’s new. It shouldn’t need to be fixed.
And if it does, that’s what the warranty is for.
The maintenance comparison
So let’s look at how this affects our decision to buy the new 2020 vs the used 2017 Corolla.
The new Corolla
The 2020 Corolla will be covered for the first 3 years. And the drivetrain is covered for 5 years.
Your only maintenance costs will be for things like oil changes, brakes, and other parts of the car that are prone to wear and tear. CAA estimates that every kilometer you drive costs about 3.69 cents (based on a Camry LE and 18,000km driven), which puts your yearly cost at approximately $664.
That cost might seem high, but it’s always a good idea to budget high instead of low.
Related: Desjardins Car Insurance Review: Limited Availability And Higher Premiums
The used Corolla
The 2017 Corolla will likely be covered by a certified pre-owned warranty. Using this Toyota dealership as an example, this’ll give you a 6-month or 10,000 km powertrain warranty. If you want more warranty, look at getting some extended coverage, as mentioned earlier.
But what if you need to repair it? Based on this report, the average car will cost 5.6 cents/km driven in repairs. With that figure, the 2017 Corolla could cost anywhere from $560 – $1,680 in yearly repairs (based on 10k – 30k km/year). And that’s just for the average.
We can never account for the unknown. Once again, budget high.
That powertrain warranty is only good for 10,000km, so you might be replacing a major engine component if you aren’t careful. But we don’t expect this to happen with a Certified Used car, since they usually undergo repair and reconditioning by the dealership.
But if we’re to assume the CAA estimation is right, here’s the difference of maintenance costs between the 2 cars, based on different driven levels:
| Distance driven per year | New cost ($0.0369/km) | Used cost ($0.056/km) |
|---|---|---|
| 10,000km | $369.00 | $560.00 |
| 15,000km | $553.50 | $840.00 |
| 20,000km | $738.00 | $1,120.00 |
| 25,000km | $922.50 | $1,400.00 |
| 30,000km | $1,107.00 | $1,680.00 |
Winner: New
Average cost of gas
We also need to account for fuel efficiency and the cost of gas. This depends on your car’s fuel efficiency, how much you drive per year, and the cost of gas in your area.
The gas comparison
This won’t be much of a difference here since these cars are only 3 years apart. But the older the car you’re looking at, the less fuel efficient it likely is – which means you’ll have to refill more often.
Related: Best Credit Cards For Gas Discounts 2020
The new Corolla
The 2020 Corolla gets somewhere between 6.7 – 7.4 combined city and highway fuel economy. We’ll use the median figure of 7.05 L/100km for our calculations.
With gas costing around $1.30/L, we estimate that the new car will cost about $0.09165/km (about 9 cents/km).
The used Corolla
The 2017 Corolla gets 7.5L/100km. It will cost $0.0975/km (about 10 cents/km).
There’s almost a 1 cent difference per km, which is a difference of $1/100km.
Here’s how this difference looks like when you consider different driving levels:
| Distance driven per year | New cost ($0.09165/km) | Used cost ($0.09750/km) |
|---|---|---|
| 10,000km | $916.50 | $975.00 |
| 15,000km | $1,374.75 | $1,462.50 |
| 20,000km | $1,833.00 | $1,950.00 |
| 25,000km | $2,291.25 | $2,437.50 |
| 30,000km | $2,749.50 | $2,925.00 |
Winner: New
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The better your credit score, the better your interest rate.
Of course the best choice in either scenario is to pay for the car outright. More often than not, that’ll be impossible for you with a new car…but a $5,000 used car may be in your reach.
A budget, patience, and savings are your friends.
The financing comparison
It can be hard to find financing interest rates openly published on dealership websites. A dealership might even give you the run-around when you ask specifically. They’re often only interested in talking about monthly payments, and avoid talking about financing rates all together.
So, instead, let’s look at a deal offered by one dealership who published their interest rates on their website:
- The 2020 Corolla: 2.29% up to 84 Months
- The 2017 Corolla: 5.59% at 72 Months
Going with the 24 month term for the used car is likely the only way to compete with new car financing.
Of course, this depends on your dealership, your credit score, and how well you can haggle – but generally, this is the case.
Continuing our example, if you were to make monthly payments, this is how much you’d end up paying in interest alone over the course of the loans:
- New: $2,219.06
- Used: $3,830.65
Winner: New
So what’s the total cost? Was Dad right?
At the end of that day, Dad exaggerated a bit. I’m sure he was giving me a bit of a scare to make sure I became a cautious consumer. That isn’t a bad thing. But he wasn’t altogether wrong either.
Here’s the total cost over 5 years of ownership (based on 10,000km/year):
| Category | New 2020 Corolla | Used 2017 Corolla |
|---|---|---|
| Sticker Price | $23,591 | $18,900 |
| 5-year depreciation* | -$11,209 | -$7,740 |
| Insurance | $8,969 | $8,085 |
| Maintenance | $1,845 + better warranty | $2,800 + unknown |
| Cost of gas | $4,582.50 | $4,875.00 |
| Financing (total) | $2,219.06 | $3,830.65 |
| Total cost after 5 years | $41,206.56 | $38,490.00 |
*Included for the purpose of summary, but not included in the total cost.
Using this table, it looks like Dad’s advice is still pretty sound. The areas where the used car wins, it wins big. Sticker price, depreciation, and insurance are great ways to save.
Cars are becoming more reliable, and if you do your research, you’ll avoid a lemon and those nasty repair bills. Couple that with an extended warranty and you’ll only need to worry about brakes and oil changes.
In the end, if you want a new car, the savings won’t outweigh your desire to purchase new. The heart wants what the heart wants.
Related: RBC Auto Insurance Review: An Average Offering From One Of Canada’s Big Banks
Final thoughts
If you’re planning to drive the car into the ground, and you do your research, then why not buy new? You’ll have it forever and the initial hit from depreciation won’t matter in the long run.
In all other events, I still think the 3-year-old used car is a great deal. Even if it’s only better by a small margin. Shop around, haggle for a good price, and you can increase that margin by quite a bit.
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