Everyone knows that used cars cost less than new ones, and many thrifty car owners think buying used vehicles makes the most financial sense in the long run, especially if you keep them until they die.
But, wait! The world is turning upside-down! Wholesale used-car prices have risen 4.7% over the past year, about four times the current inflation rate, The Wall Street Journal reports, citing the Manheim Used Vehicle Value Index.
Minivans had the biggest price gains, at 10.6%, followed by pickups at 10.1% and SUVs at 5.6%. The worst performers were used luxury cars, up only 0.2%.
Used vehicle prices have gone up due to short supply, especially since drivers are keeping their vehicles longer now that the economy is weak. Supplies of late-model used vehicles are also tight because new vehicle sales slumped in 2008 and 2009.
At the same time, new car dealers are dropping prices and offering rebates to lure reluctant buyers. With this combination of factors, the dealer might well offer more for your trade-in than you’d have received a year ago.
Obviously, if you can buy a new car for about what you’d spend on a comparable used one the new car would make sense. You’d have a brand-new warranty and no worries about how the previous owner had treated the vehicle.
But the Journal’s point about some new cars being cheaper than used ones focuses on used vehicles that are only a year old, and it looks at monthly payments rather than retail prices. Rates on used-car loans are usually higher than those on new-car loans, so a used-car loan can cost more per month than a new-car loan for an equal or somewhat larger amount.
Used-car stalwarts don’t generally focus on cars that are only one year old. Though car values do tend to drop further in the first year than in any other, they continue to drop pretty fast in years two, three and four.
In fact, a five year old vehicle may sell for only a third of its original cost but still have two-thirds of its life ahead of it. For used-car buyers, vehicles in the three to five year old range are in the sweet spot – cheap but still in pretty good shape.
Before buying any vehicle, check values out at sites like Kelley Blue Book, the NADA Used Car Guide and Edmunds.com.
Also, look past the purchase price to consider the overall cost of ownership, which includes interest on the car loan and projected maintenance and repair costs. Edmunds has a guide to these costs on its site.
And, of course, use the sbup shopping tool to find the cheapest loan you can get.
Finally, consider the value of any dealer rebates, which often come at the price of a higher loan rate. The Auto Rebate vs. Low Interest Financing Calculator can guide you through that assessment.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.