Used Car Pricing Guide: Assessing Risk and Value
Why Buy a Used Car?
Buying used means paying less. Not only is the car's sticker price lower, you also pay less on expenses like taxes and car insurance, while letting the original owner take the depreciation hit.
New Car Depreciation Rate
Depreciation is what many experts cite when they caution against buying new - And for good reason! Within the first three years, new cars typically lose somewhere around 40-60% of their value. Think about it this way: In three years, a new $40,000 Vehicle may only be worth somewhere around $20,000. This may be acceptable if you intend to only buy a car once every ten years. But if you are among the majority of American car buyers who purchase a car every two to five years, you are in danger of losing a significant amount of money. For help deciding whether new or used is right for you, check out this calculator from BankRate.com.
Researching the Depreciation Rate
Not all vehicles depreciate at the same rate. For instance high-end, luxury models typically depreciate quicker than economy cars. This is because the more value a car has, the further it has to fall before it reaches its base utility value. Not every car follows this formula. According to MSN the 2004 BMW 3-Series held its value surprisingly well – only losing about 25% of its value after the initial 36 months.
Advantages of Used Cars Vs. New Cars
While depreciation rate is one compelling argument, it is not the only advantage of buying used:
- More Car for Your Money: You could buy a three-year-old fully loaded Honda Pilot for about the same price as a brand new Honda Accord with just a base package.
- Lower Car Insurance: On average used car owners pay less in car insurance when compared to new car owners.
Researching Your Used Car
While buying used has its advantages, it also comes with some associated risk. To protect your investment and get the most value out a used car, you'll need to answer the following questions:
- What is the car's market value? How does it compare to similar vehicles?
- What is the car's history? Who owned it? Was it properly maintained?
Used Car Market Value
When buying a used car, whether it is from a dealership, off the internet or out of the classifieds, your first concern is confirming that you are receiving top value. Kelly Blue Book has long been a respected source. Whether you are buying from a dealer, a private seller, or trading in, Kelly Blue Book offers a starting point for negotiations:
- Purchasing from Dealer: The retail value serves as a starting point for negotiations between the dealer and car buyer. This value includes expenses like advertising, sales commission and operating costs. KBB.com also assumes the dealer spent money reconditioning the car, repairing or replacing worn items like brake and tires.
- Purchasing from Private Owner: Private party value is what you could expect to pay for a car if you purchased it from an independent seller. This value is usually lower than the retail price because it assumes the car is being sold "As Is."
- Trading a Car In: Trade-in Value is what you could expect to receive if you traded the vehicle into the dealership. Because the dealer will incur additional expenses, such as safety inspections, reconditioning, marketing and reselling, this value is lower than what you would receive if you sold it privately.
Used Car Vehicle History
Determining value is only half the battle. To guard against purchasing a lemon, research the following:
- Previous Owners: Research suggests that vehicles with one prior owner have fewer miles and less overall wear and tear.
- Prior Accidents: Has the car been in a major accident? Even if it has been inspected, you may want to steer clear.
- Scheduled Maintenance: Ask for maintenance history. You want to ensure that the vehicle has routinely met its scheduled maintenance requirements.
The good news is that the internet makes researching vehicle history easy. Government sponsored sites like Safercar.gov and the Insurance Institute for Highway Safety can provide specific details on car safety ratings. While other websites like vehiclehistory.gov, Carfax.com, Autocheck.com, and NadaGuides.com offer details on accident history, maintenance and value.