What’s best: a new car or a used one? Most people come down solidly in either camp. People are pretty passionate about it. But there’s a third alternative that may represent a sweet spot offering the best combination of “newness” and affordability.
That’s to buy a car that is 2 years old and to sell it two or three years later.
The strategy, explained in an article on Edmunds.com, exploits an often overlooked fact about car depreciation.
New vehicles typically lose about 20% of their value the moment they’re driven off the lot, and another 10% in the first 12 months. Most people know that — it’s why leasing is so expensive in the long run. After a couple of years, depreciation levels off. Many people know that too.
But after five years depreciation picks up again — measured not in actual dollars but as a percentage of the previous year’s value. Not many people know about this.
After five years, the average car has gone about 60,000 miles, and is getting closer to some major expenses like tires and a new timing chain, Edmunds explains. The finish may be getting a little chalky. People see a 5-year-old car as old, even if it still has 150,000 miles left in it.
So the smart buyer gets a 2-year-old car cheap, benefitting from the heavy depreciation suffered by the first owner. The new owner drives the car for three years and then sells it for nearly as much as was paid, bailing out before the price plunges again.
By doing this repeatedly, you can approach car-owner Nirvana — practically driving for free, Edmunds says. Well, not including gas and all that other stuff, though registration and insurance are cheaper on a vehicle that’s less valuable.
This two-through-five strategy should be especially appealing to drivers who want to save money but don’t want the headaches of owning older vehicles.
On a purely financial basis, the best approach is more extreme: Buy a 2- or 3-year-old vehicle and keep it until it falls apart. It may be worth little after seven or eight years but still have five or six good years ahead of it.
This approach accounts for the fact that although depreciation, as a percentage of value, may pick up after five years, it doesn’t cost you so much in actual dollars. That’s because 20% off of $5,000 is a lot less than 20% off $30,000.
Clearly, a 10- or 12-year-old car will have more maintenance expenses than a new car. While those costs may be less than you’d shell out in payments on a new vehicle, at some point owning an old car is more trouble than it's worth, even if it’s financially sound, so many people don’t go for the drive-until-dead approach.
There's also one final factor to consider. Edmunds points out that used-car prices are very volatile. An adept buyer can pick up a 2-year-old car when prices are slumping and a few years later time a sale for a moment prices are high. Of course, that might be an expensive time to buy a replacement, so timing the market would work best if you have other transportation to use while you wait for prices to fall.
For many drivers, that may be taking it a step too far. But the middle-of-the-road option — the two-through-five strategy — can offer a great opportunity to drive safe, attractive, hassle-free vehicles and to save a lot of money at the same time.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.