When browsing the lots of used car dealers, it’s important to not buy a car on your first visit or on a whim. Why? Well, like any large financial transaction, you should plan carefully. Figuring out what you can afford, setting a budget, determining what type of vehicle you need — this is only a fraction of what needs to be done ahead of your purchase. If you want to go even further, there’s more research required if you want to save big bucks on a used car. Particularly, a used car that’s still considered relatively new, which would be between two-four years old. Thanks to the depreciation of a vehicle, used car buyers have a real opportunity at getting a great deal.
Let’s go over depreciation real quick.
As a general rule of thumb, a new vehicle will lose at least 20% of its value as soon as you drive it off the lot. While those reading this who just made the tragic mistake of buying a new car are in tears right now, the used car buyer should be getting excited. It doesn’t stop there, because the vehicle will continue to depreciate until it’s worth zero dollars on paper.
Edmunds.com provides further insight with some data, and the industry expert pegs first-year depreciation at almost 22% for the average car. After that, it will lose 12% of its value annually within the next two to four years.
For a better perspective, the average price of a new car in 2016 is $32,000. Take away 20% of that — $6,400 — and you’re left with a $25,600 value at the end of the first year. In its second year, it’s going to lose another $5,120, putting it at $20,480. Now, take away 24% of that (for the next two years) and it’s worth roughly $15,565 from its original MSRP of $32,000. Ouch!
Obviously, targeting cars between two to four years old is the sweet spot for used car purchases.
Hitting The Sweet Spot
It’s not just considered the sweet spot because you’re saving money at the time of purchase, but also because you’re saving money on the other end. You won’t buy a new car and then lose 20% of its value immediately. Therefore if you ever went to sell it, you’d be getting closer to what you paid for it initially.
For bonus points, snag a used car that just came off a three-year lease. Not only will you be able to save around 25% compared to the price of a new model, but you’ll also be getting a used car that you know has relatively low miles and was taken care of properly, thanks to the terms of the previous owner’s lease. If you get one that’s two years old, you’ll be getting a vehicle that’s still under factory warranty. It might be a little more expensive than a three or four-year old model, but not by much. It’ll still be significantly cheaper than a new model MSRP, and that factory warranty makes it all worth it.
Buy a used car like this and drive it for three or four years. After that, if you want, buy another one.