Depreciation works on a curve
First, consider that depreciation isnít the same for new and old cars.
New cars depreciate much faster than used cars. When you drive a new car off the lot it loses 9-11% of its value immediately. Within 12 months, the average car will have lost 20% of its value. After that point, a car will lose about 15-25% of its current value every year for five years. After that, depreciation still happens, but at a slower rate.
The used car age sweet spot
Taking these figures into account, buying a vehicle thatís 2-3 years old means youíre getting a nearly new vehicle while taking none of the depreciation hit yourself.
As an example, a car that would have cost you $30,000 new can be yours for around $16,000-$20,000 if you wait 2-3 years to buy it.
Even further savings can be made if you purchase an older vehicle. A five-year-old car will typically have lost around 60% of its value. So, our $30,000 example vehicle can be yours for around $12,000 five years down the line.
Factors that affect depreciation
Vehicle models depreciate at different speeds. Luxury sports vehicles, for instance, have a high rate of depreciation because the typical buyer always wants the newest model.
Vehicles considered reliable depreciate the slowest. Currently, the Jeep Wrangler, Toyota Tacoma, and Nissan Frontier have some of the lowest five-year depreciation figures on the market.
Conversely, vehicles that have had recalls or are known to be expensive to repair have extremely high depreciation. While you may find a bargain, you must carefully consider the cost of ongoing repairs when buying one of these models.
Considering maintenance costs
Modern cars are, on the whole, extremely reliable even as they age. The average five-year-old car costs about $350 in repairs, while a 10-years-old car has an average annual repair cost of just under $600 a year. A five-year-old car may only suffer a major problem every three years while a 10-year-old car is likely to encounter a problem every 18 to 20 months.
More than just sticker price
We shouldnít forget that newer models often have advantages over their older counterparts. For instance, in 2012, electronic stability control was mandated for all cars, and side curtain airbags became standard in most vehicles. Backup cameras were available on many 2012 models. Other advanced active safety features became more widely available in the 2012 model year, so itís a good place to start if safety is your primary concern in purchasing a used car.
Newer vehicles often have better mileage, too, which can save you money in the long run. And you often find more gadgets and better stylistic choices in newer model years.
The best age for purchase of a used car is highly subjective and comes down to your priorities. Purchasing a used car that is just 2-3 years old is a massive saving on new car prices and you get a virtually new car. But if you are willing to potentially sacrifice on styling and features, a five-year-old vehicle offers even more dramatic savings and is unlikely to cost much more in annual maintenance.