Massive Depreciation in the First YearWhat they fail to understand is that depreciation is greatest in the very first year of ownership. For example, letís take a midsize sedan that retails for about $28.000. In the first year, the car loses about $7,500 in value. Thatís a big hit. However, over the next year, the value drops only about $1,100. And when you combine the drop in value for year 2-4, it only loses $6,000. Amazingly, the value drops less in those three years than it does in the first year alone.
Target Cars that have Passed the First Drop in DepreciationSo for used car shoppers, purchasing a car thatís two to three years old and driving it for three years results in some of the lowest costs for recent model cars. You neednít be concerned with repairs as the bumper-to-bumper warranty can be transferred to you and the powertrain warranty will continue beyond that, reducing the likelihood that you'll have major expenses. Depending on the car, there may even be bumper-to-bumper warranty coverage in the fourth year.
So if you buy a car that is one or two years old, and drive it for three years, it will only cost you about $7,000 in total depreciation. That's around $2,333 per year. This is the result of avoiding the initial drop in depreciation that new cars see and provides you the best value in purchasing a used car.
So is Purchasing an Even Older Car a Better Idea?So if waiting a little bit is good, is waiting longer better? Not necessarily. There is a second steep depreciation drop that occurs, though its timing varies by type of vehicle. For example, in luxury cars, it occurs sooner than in pickup trucks. This is typically centered around the fifth year after the initial sale. Most likely the car has been driven for 12,000 miles a year, which reads 60,000 miles on the odometer. At 60,000 miles there are some rather major service issues looming, such as the expensive replacement of the timing belt in cars still fitted with one, tires are worn out around this time, the brakes typically need service, the interior is showing signs of wear, and the paint is a victim of both oxidation as well as parking-lot nicks and scratches.
Advantages to Holding Onto an Older CarThatís not to say that you should necessarily bail on your used car before that point. There are several advantages to holding onto the car. First, it may be completely paid off, and no car payment is a good thing. Youíll pay less in insurance and your state license fee may go down as well.
In fact, the maintenance costs on older vehicles remain relatively low over the long run. While depreciation removes almost half of the value of a vehicle after five years, repairs and maintenance only add up to about three percent of the original cost of a vehicle after five years, and on average, these costs ramp up slowly. 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.
It should be noted that the above advice applies primarily on cars from Asian and American car makers. European car makers fall into an entirely different category. While the average 10-year-old car may cost $600 a year to repair, the average Mercedes-Benz costs more than $1,500 a year to keep running at that age, with the average BMW costing you about $1,300 in repairs. Even older Mini Coopers accumulate more than $1,000 a year in repairs on average.
To many people, itís not the cost of repair of an older car that drives them to purchase a new (or newer) one, but rather the concern about picking up and dropping off children on time or getting to work at the start of each day. As mentioned earlier, modern cars are extremely reliable, even as they age. Even 10-year-old cars have less than one problem per year that needs repair. For example, a five-year-old car may only suffer a major problem every three years and a 10-year-old car would have a problem only every 18 to 20 months on average.
Newer Is SaferIn 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.
In conclusionFrom the data weíve accumulated, it would appear that the best plan would be to purchase a car just a few years old and drive for another two to three years. This strategy reduces both maintenance and repair costs, as the car is still likely under warranty, as well as avoids the two major dips in depreciation.