The average person owns 13 cars in a lifetime, each costing an average of $30,000, according to a report by the National Automobile Dealers Association. If each of those cars was 3 years old, instead of new, you could save nearly $130,000 during your lifetime.
The real money-saver in buying a used car is wrapped up in a sinister-sounding financial word: depreciation.
Depreciation: Car buying’s dirty little secret
Once you fully understand how depreciation sucks money out of your wallet, you’ll learn how to save boatloads of cash over your lifetime. You often hear that a car loses 20% of its value as soon as you buy it. Yes, in just one minute, a $30,000 car will lose $6,000 as you gleefully drive off. By the end of the first year, mileage and wear and tear could bring that to 30%, or $9,000. Why don’t you feel this big hit? Because it takes effect much later, when you sell or trade in your car.
Take a look at two similar cars, one new and one used.
New-car depreciation: You buy the car for $30,000 and sell it three years later for $15,000. The car has cost you $15,000 in depreciation.
Used-car depreciation: Now let’s say you buy the same car, but it’s 3 years old when you buy it. You could buy the car for $15,000. Three years later you could sell it for $10,000. So the used car depreciation cost you only $5,000.
Now, if you’re paying attention, you would quickly say, “But driving a brand new car is much better!” You’re absolutely right. So, if driving a new car is worth an extra $10,000 to you, go for it. But don’t say we didn’t warn you.
Forget the old used-car stigmas
It used to be common for people to put down used cars by saying that it was just a way to buy someone else’s problems. That’s not true anymore. Here are two updates on old knocks against used cars of recent vintage.
Reliability: Cars have never been more dependable than they are today. It’s not uncommon for some cars to deliver more than 100,000 miles before needing major repairs.
Maintenance: All cars require regular maintenance such as oil changes, tire rotation, brake jobs. But you can drive today’s cars much farther in between these scheduled maintenance visits. Even tires and brake pads last much longer than before.
More used-car advantages
So it’s pretty clear that buying a used car is much cheaper and that cars in general are more dependable. But take a look at these other advantages:
Lower car insurance rates: When a vehicle is worth less, it costs less to insure it when you’re buying collision and comprehensive coverage. You can also drop collision and comprehensive coverage, which pay for repairs to your car, and save even more.
Registry renewals are cheaper: The cost of registering a used car goes down every year.
Move up to a luxury car: Because you can save 30% or more, you can shop in a higher class of cars.
Less stress: Got a ding in the door? Who cares? But when it’s the first dent in your new car, it’s a huge bummer.
While nearly everything about used cars costs less, buying a new car has its advantages.
New-car shopping is easier: All new cars are assumed to be perfect, so evaluating the condition isn’t a factor. No need to take it to a mechanic. Also, it’s easier to figure out what you should pay for a new car, even if the negotiation process is still a pain.
More financing options: Automakers offer plenty of incentives to lure buyers, such as cash rebates. New car loans have better interest rates. This means you’ll likely pay thousands of dollars less than the frightening sticker price once you negotiate a final price and apply the incentives.
Advanced technology: New features for comfort, performance and safety are introduced in new cars every year. You’ll need to wait several years to get them in used cars.
Peace of mind: A new car will likely be more reliable than a used one, even though pre-owned cars are much more dependable than in the past. If a new car breaks down, you can have it fixed for free under the included factory warranty, at least for the first 36,000 miles or three years that most carmakers offer.
Prestige: Let’s put it this way: You don’t hear many people bragging about the used car they just bought.
An exception to the rule
Not all cars depreciate at the same rate. Some brands are known for holding their value exceptionally well. When you add in possible new-car incentives and low-interest financing, there are times when buying a new car doesn’t cost much more than buying a 1- or 2-year-old car.
You can find how much cars depreciate on several automotive websites, such as Kelley Blue Book’s 5-Year Cost to Own or Consumer Reports’ Cost of Vehicle Ownership.
What it means for you
Depreciation is a silent killer to your automotive budget. But by buying cars that hold their value, you can minimize the effects. If you’re still on the fence, use the NerdWallet car loan calculator to see how much less your monthly payment would be if you bought used instead of new.