It’s an oft-cited rule of thumb that cars lose at least 20% of their value when you drive them off the lot. But that’s actually just the beginning of a scenario that, if you work the angles, can save you a ton of money on vehicle ownership.
Data from Edmunds.com puts first-year depreciation at almost 22%, and roughly 12% annually in years two through four. Taking an average midsized sedan as an example, with a selling price of about $24,000, that first-year depreciation drop means an initial loss of almost $5,300, and the car has lost about half its value by the end of year four.
Lease returns soaring
This isn’t good news for the new-car buyer. But the savvy used-car buyer can use this information to save money on both ends of the ownership cycle. Furthermore, with the increasing popularity of two- and three-year leases, there’s a flood of good used cars to choose from.
Used-car shoppers should try looking for 2- and 3-year-old cars coming off lease, says Lisa Rosenberg, an analyst for CarGurus.com, a car shopping website that features 5 million new and used vehicles. CarGurus’ data show that a person could save at least $6,750 buying a 2-year-old formerly leased car, a 25% savings over a new model. Additionally, a 2-year-old car will still be under factory warranty.
[In the video below, produced by vinadvisor.net, NerdWallet’s Philip Reed and other auto experts share tips on used-car buying.]
Tony Hoang, head of vehicles at eBay Motors, has a slightly different take. “If you are looking to get a great value for nonluxury, midsize vehicles, [you] should purchase a used vehicle that’s around a year old,” he says.
To sell that car “strategically,” Hoang says to put it back up for sale after about four years since it still holds much of its value, based on the used purchase price. After the fifth year, the value begins to drop as the factory warranty expires and repairs and maintenance increase.
Putting it all together, if you buy a used car and drive it for three or four years, you’ll get a modern set of wheels at a bargain price. Edmunds estimates that the three-year depreciation cost of an average midsize sedan, bought at 1 to 2 years old, could be as low as $7,000, or about $2,333 each year.
But Hoang points out that each vehicle class has its own peculiarities when it comes to depreciation. For example, the market for midsize sedans is softening as the popularity of SUVs and trucks increases.
Make depreciation your friend
It’s important to understand the effect of a car’s depreciation on your automotive budget and that you pay dearly for that whiff of new car smell. A chart of ownership expenses on Kelley Blue Book shows that depreciation is the single biggest expense, dwarfing the cost of fuel, insurance, registration, financing and maintenance.
Buying a near-new car is easier today than ever before, particularly if you take advantage of nationwide Internet searches and online vehicle history reports. Even the interest rates for used cars have dropped, increasing the overall savings. Concerns about buying a car sight unseen are addressed by a network of mobile inspectors such as WeGoLook.com, which recently teamed up with eBayMotors to provide onsite inspections for $69.
An oft-cited disadvantage of buying used is that you don’t get the latest technology. However, many safety features, such as blind-spot warning and forward collision avoidance systems, have been on the market for several years and are now available in many used cars.
Choosing a car that depreciates slowly can save you thousands over a four-year ownership cycle. Buying the car after it’s already depreciated — and selling it strategically — reduces your costs even more.
Philip Reed is a staff writer at NerdWallet, a personal finance website. Email: [email protected].
This article was written by NerdWallet and was originally published by USA Today.