Personal finance gurus have always talked about the value of buying used instead of new cars, and for good reason. For the better part of two decades vehicles would depreciate at a fairly rapid rate and buying even a very slightly used car could save you thousands. So it made sense to let the original purchaser take the big initial depreciation hit and you reap the rewards of getting a like-new car still with a warranty. Well, new data suggests that due to the economy, times have changed a bit. Now it may be better to buy new versus used vehicles.
Today, used cars are still cheaper than their new counterparts, but the difference is far less than it has been in the past. This is good news for those who are sitting on a relatively new vehicle that is a few years old because the resale and trade-in value is much better than it was just a couple of years ago. So if you’re in the market for a new car it may actually make sense to trade in your used car that’s priced at the peak of a trend and then find a great new car deal.
Here are a few examples:
A one-year-old Honda Civic that NADA’s Used Car Guide valued at $14,275 in May is now estimated to be worth $15,950. “The same car,” says Jonathan Banks, NADA’s executive auto analyst.
KBB.com, the Web home of the Kelley Blue Book used-vehicle-pricing franchise, says a three-year-old Toyota Prius is worth, on average, $17,750 as a trade-in, up $6,050 from the value of a three-year-old Prius a year ago.
Can you believe it? Some vehicles may actually be maintaining their value over time, and in some cases appreciating. This is a stark difference from pre-economic crisis times when it wasn’t uncommon for vehicles to depreciate steadily at 10-20% per year.
Type of Vehicle and Age Matters
Of course, this rosy picture isn’t universal to all makes and models. The best prices, obviously, are reserved for desirable vehicles. With today’s relatively high gas prices that means smaller, more fuel-efficient cars are reaping most of the rewards. Your truck or SUV that gets 16 mpg probably isn’t on the top of many people’s wishlist right now.
That being said, the effect is trickling down and even less-desirable vehicles are not depreciating nearly as fast as they have in the past, and in some cases prices are remaining steady or seeing slight increases in recent months. So it still may be a good time to get rid of that gas-guzzler in favor of something else.
Unfortunately, the age and condition of the vehicle plays a large role as well. These improved prices are typically for vehicles less than three years old and in good condition. Once you go beyond three years, where in some cases some or all of the warranty has expired, the market is a little softer. I was kind of bummed to learn that since we are in the market for a new vehicle, but both of our vehicles are quite a bit older. One is about nine years old and the other is six years old, and they have both seen better days. But I pulled them up on KBB and surprisingly, their values haven’t dropped much at all since the last time I looked about a year ago. And when I’ve been looking at used car prices for what we’re looking to buy I’ve been shocked at how little difference there is in price of a used model with 15,000 miles and a brand new model. It’s next to nothing.
Shopping for a New Car
If you are considering a vehicle purchase it still pays to do your research. Make sure you look up the value of the vehicle you plan on trading in or selling privately so you know what a reasonable price is. This ensures you get a fair deal. Then when it’s time to begin looking for that new or used car to buy, do the same research to understand what a fair price is. Because the demand for some used models is so high these days it is possible to have dealers being a little aggressive on price. And finally, take the time to compare new model prices versus slightly used prices. If you can pick up a one or two year old model with low miles for well under the sticker price of new with the same features, it may make sense to go that route. But if in the end the difference in price ends up being less than 10% it may be worth considering just buying new instead.
Finally, when you are in the showroom don’t let the car salesman’s tricks get you to buy more car than you actually need. Watch out for the up-sell, bait-and-switch, and financing tricks that will get you to blow your budget. In fact, try to get financing lined up before you even step foot into the dealership and have a final sale price set in your mind. Negotiate based on the sale price, not on monthly payments that they will undoubtedly try to use to make the car look more affordable when all they are doing is stretching the loan and charging higher interest.
Being a smart shopper with a gently used vehicle right now puts the ball in your court. Make the most of it, but don’t simply use this as an excuse to buy a new car if you really don’t need one right now. But if you are in the market, then it’s at least worth considering given the market conditions.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.