A stabilized rate of depreciation (7% - 12% per year) makes used cars a better value than new ones. New vehicles lose an average of 20% of their value the instant they are driven away from the dealership. When coupled to the average yearly depreciation of 7% to 12%, your first year's loss is anywhere from 25% to 35%. That translates to a first year $6,000 to $8,000 loss on a $22,500 new vehicle, or a $10,000 to $15,000 loss on a $40,000 one. And that's for a vehicle only driven the average 13,500 miles. If you drive more than that, your depreciation will be greater (35% to 50% for the first year). Don't forget to factor in your financing, which will add another $1000 to $3000. From the investment point of view, this is a lot of loss. Another drawback occurs if a new car is totaled in an accident. Often the insurance is not adequate to replace the car. When buying a car, the interest on the loan is paid off faster than the principal (the vehicle itself). Less money has gone to the reduction of the purchase price, and insurance only covers the vehicle value, not the interest, so there can be a cash shortfall.
Luckily the rate of depreciation is not uniform. Some popular cars (Honda Accords, for instance) hold their value much better than others (Ford Taurus - Jeep Grand Cherokee). When a car model is totally revamped, especially if the name is changed, the older version usually drops in value more quickly. Those used cars are generally good buys. Because late-model (2-4 year old) used cars have not declined significantly in either mechanical reliability or appearance, they remain the best bargains.
Off-Lease Bargains - Because leasing demands regular upkeep, off-lease vehicles are a good place to start a used-car search. As leases have become popular, large numbers of well-maintained, 2- to 3-year-old cars are coming off lease in increasing numbers. Because of the stringent lease mileage restrictions and maintenance requirements, these vehicles practically qualify as new, even in appearance; and usually are still covered by the remainder of their original warranties. Currently there's a glut of Jeep Grand Cherokees and Ford Explorers & Tauruses flooding dealer lots at bargain basement prices. To keep that metal moving, many manufacturers offer special packages designed to enhance the appeal of those vehicles. This began with luxury brands, but now every major automaker has used-vehicle lease and certification programs.
Leasing Crisis - Millions of car leases financed by banks are expiring just as domestic new car prices are falling. In 1998 only 38% of lease customers turned in their vehicles at the end of the lease. Due to aggressive pricing and rebates offered by domestic automakers that percentage has risen to over 56% this year and banks and finance companies are panicking. The result is a gap between what banks expected the vehicles to be worth and what they're actually fetching at wholesale dealer to dealer auctions. In 2000 that gap cost banks about $2,000 per vehicle. This year (2001) losses are expected to rise to between $2,500 & $3,000 per vehicle. Major financing companies like GE Capital and First Union have eliminated their leasing programs altogether while Chase, Bank of America, and Bank One are significantly scaling back their operations. The manufacturer's financing companies (Ford Credit - GMAC - DC Credit) aren't suffering nearly as much because their leasing losses are offset by the profits made when the vehicle is sold initially. Losing money on lease turn-ins is seen as a normal part of doing business for the Big Three.
Program Cars - "Program" vehicles can be a mixed blessing. A program car may be a dealer demonstrator, a company executive's car, or an off-lease or fleet vehicle. Former rental cars sometimes enjoy that moniker. Rental cars and former fleet vehicles are the least desirable types of "Program Car." Some are overworked and under-maintained, while others have had regular oil changes, tire rotations, and other preventive maintenance. Some rental companies such as Enterprise and Hertz have been accused of infrequent or non-existent oil changes. It can be hard to tell whether the company followed the manufacturer's new car break-in and maintenance schedule.
At the wholesale level, rental cars are usually worth 10% to 15% less than a comparable new car trade-in, for many reasons: people who rent vehicles often mistreat them, maintenance records may not be kept, and salesmen may have driven them. I know quite a few salesmen, and most of them treat their own cars very poorly, so I wouldn't expect them to treat a rental car any better. If you are looking at a former rental or program car, ask to see its maintenance records, and don't be surprised if there aren't any. Insist on an independent mechanical inspection, and try to find out which rental company owned it initially. Finally, consider your options. Is this car priced significantly lower (10% to 15% less) than a factory certified model at another dealer?
High-Mileage Vehicles - Are you willing to take a chance to save yourself many thousands of dollars? Safety-conscious people on a budget might want to consider late-model cars with high miles. I have sold and driven 1- and 2-year-old cars with high (50,000 - 75,000) mileage almost exclusively for the past four years and haven't experienced any more maintenance expenses than with a typical average (15,000 - 30,000) mileage 1- or 2-year-old-car. The more miles a vehicle has on it the shorter its functional life will be no matter how well cared for it was, but since an average car lasts for 145,000 miles, a vehicle with 60,000 miles can still give you six or seven years of useful transportation, if you drive 12,000 to 15,000 miles a year. The big advantage is driving new technology while paying for old. For example, a 2-year-old 1998 Ford Taurus GL with 65,000 miles in excellent condition would cost about $7500. A 5-year-old 1995 Taurus GL in the same shape with only 30,000 miles on it would cost you about the same. While the '95 Taurus was a safe car in its day, the '98 version is a very safe, totally modern car with dual airbags, antilock brakes, remote locks, and the best cup holders in the business. If you are on a limited budget and willing to take a chance, a 1 or 2-year-old high mileage full or mid-sized domestic sedan is one of the best used car values.
Other Bargains - American cars tend to be among the best used-car values because they provide more car for the money. While many people think American cars are not as good those from Japanese automakers, it's just not true. That assumption, however, helps American cars depreciate more quickly and makes them better used-car values -- a lower price for more features. Structurally and mechanically, American cars are some of the most durable cars in the world. In addition, they are often less expensive to repair, with lower-priced parts, and repair facilities more common than those for foreign makes.
Information Resources - There is a lot of information available on both new and used cars. Automotive-Links.com, Edmunds, Consumer Reports, and Autoweek are four of the best sources of auto information; in print form they're available at your public library. Specialized internet data resources like Intellichoice can show the costs associated with certain makes and models. Don't buy a car without consulting with all of these information goldmines.
Orphan Cars - Avoid orphan cars like the plague. An orphan is a vehicle whose parent company no longer sells or supports their vehicles in this country. Parts and service are nonexistent for many of these orphans. It's unfortunate, but some of my favorite cars have become orphaned. The German-made Merkur Scorpio of 1988 and 1989 is my favorite car of all time. Ford still makes the car in Europe, but has totally abandoned the loyal stateside owners of this fine vehicle. Alfa Romeo, Peugeot, and Sterling are some of the popular abandoned marques that can still be found for sale. Forget about Yugos, Fiats, Citroens, Renaults, Lancias, Maseratis, and Bertones too. I notice that almost all of the orphans are from France or Italy, but I can't explain why.