It seems like a no-brainer that buying a used car, even one only two or three years old, would be cheaper than purchasing a new one. And this has traditionally been the case. But you can’t always count on that type of logic because, depending on the state of the economy, you sometimes find unusually good deals on new cars. It’s always a good idea to crunch the numbers and never assume anything when it comes to such a costly purchase.
New Car Depreciation
New cars lose their value faster than the latest teenage pop star. As soon as you drive one off the lot, the car depreciates. Here’s why: you probably paid retail price at the dealership, but as soon as you buy the car, it’s worth wholesale price -- the price the dealer would pay you to buy it back. Your new car is probably worth thousands less than what you paid for it the same day you drive it home. Most cars depreciate by about half by the three year mark, according to Consumer Reports.
Used Car Depreciation
A used car that is two or three years old will already have taken a big depreciation hit, making it a better value. On average, a used car will already have lost 20 to 30 percent of its value in its first year and half its value by year three or four. If you plan to keep it for a long time, a used car may be an even better value. These days, it's not uncommon for used cars to go well past 100,000 miles if they are properly maintained. Many can hit 200,000 miles without a major problem.
You might be able to buy a 2- or 3-year-old car for less than what you’d pay for a new one, but you need to figure in the cost of repairs. Warranties typically cover a car for the first two or three years only. After that, the annual cost of maintaining the car can rise from several hundred to over a thousand dollars per year, according to Consumer Report's Auto Reliability Study. Not only will you need to pay for repairs when the car is off warranty, but as a car gets older it typically requires more costly repairs. You also will need to replace the tires, battery and brakes at some point in the future. There is always the chance, too, that the previous owner did not properly care for the car or that the car is a lemon. You can lessen your chances of buying a lemon by having a mechanic inspect the car before you buy it.
New car dealers offer buyer incentives at various times throughout the year. Typical incentives are a cash rebate from the manufacturer, zero percent financing or lower prices on new cars that are last year’s model. For many people, an incentive is enough to tip the balance in favor of buying a new car. New car purchases increase the supply of used cars available for sale, which helps shoppers who have made the decision to go with used car instead of a new one.
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