There are three things every financial expert seems to agree on: investing is good (especially through their firm), saving money is great, and buying a used car is smart. The great news for those of us who are looking at used cars is that the market is full of options. Thanks to the phenomenon of leasing, dealership lots are full of 3-4 year old used cars that have excellent attributes. And if higher mileage or a better deal are your goal, many leasees are selling their cars themselves in order to avoid overage fees at the dealership on trade-in.
What this means is that if you are looking for a “new” car, there are literally millions of options on dealership lots around the country right now. All of which are prime 3-year-old cars that still have their best years ahead of them.
Before you scoff at the idea of a used car, let’s look at a few facts. Every reliability metric you can name, from JD Power to Consumer Reports, shows that the cars built in the past decade are the most reliable in history. Most have very good ten year track records and a few minutes of research can tell you whether a specific year/make/model is likely to be a solid used car choice.
In terms of dollars and cents, it’s simple to calculate the savings you’ll have both up front and over time when you purchase from a used car dealership rather than new. The up-front cost of the car is lower since the “lot depreciation” has been paid for by the previous owner. That depreciation, on average, is in the 30-50% range over three years and is the difference between the retail (consumer) price and the wholesale (dealership buyback price) value of the car. In general, the higher the markup (more luxurious) the car, the higher it will depreciate from new to used over a three year span. To give examples, a new entry-level Honda has a depreciation of around 20% and a new high-end Mercedes-Benz has a depreciation of about 70% at three years of age.
The down-line costs (insurance, licensing/registration) are cheaper as well. And a three year old car likely has at least two more years before its first major maintenance interval (timing belt change) becomes a concern. Many cars have three, four, even five years before that comes (usually at the 80,000 mile mark, depending on the vehicle).
So the total cost of ownership is much lower with a used car and a three-year-old car has plenty of life left before major maintenance or nickel-and-dime problems related to age become issues. Most likely, you are looking at a vehicle that you can purchase at its three year mark, pay off within three more years, and still have a car that has a decent enough trade-in or resale value to get you into another car if you want.