You've probably heard the maxim of car-buying, which warns you that a new vehicle will lose 20% to 30% of its value the moment it's driven off the dealer's lot. Beware the heady and intoxicating perfume of new car smell, all ye car-crazy Fools. You'll end up with a sorry hangover dragging down your bank account.
Well, rules were meant to be broken, right? Even this rule of car depreciation doesn't always hold true when you look more closely at reality. Both buyers and sellers need to get specific about vehicle depreciation. Let's start with buyers.
A guaranteed money-loser
All car buyers should first remember that a car isn't an investment. It won't appreciate in value and leave a Fool richer than when he or she started. That's why personal finance columnists, myself included, often equate new vehicles and car loans with moldy old cheese. They stink.
Even though cars, trucks, and monster SUVs tend to lose a lot of value during their first few years, some lose that value faster than others. In fact, a few hardly lose much value at all. If you've tried shopping for a hybrid, or an especially trendy car, you've probably found out that a used car won't be the bargain you had hoped.
As an experiment, I took a look at some typical cars from DaimlerChrysler (NYSE:DCX), Toyota (NYSE:TM), and Honda (NYSE:HMC) to see how prices fell as you go back several model years. I used the Kelley Blue Book, but there are plenty of other resources you can use, including the Edmunds website, Internet sites like eBay Motors or Cars.com, or even just patrolling local used car lots and private-party ads to get a better feel for the market in your neighborhood.
What's hot, what's not
The first vehicle I looked at was a kid-friendly Dodge Grand Caravan. The price of a 2008 model starts at $22,470, according to the company's website. Kelley Blue Book says I can find a 2006 Grand Caravan in excellent condition with standard features selling for about $16,345 at my local used car dealership.
While I'm sure a 2008 will have some extra bells and whistles that won't appear on the 2006 used car, the comparison suggests I can save over $6,000 just by buying a slightly used minivan.
Not so, however, if you're looking for something, say, smaller and greener. You won't find such bargains when shopping for a Toyota Prius or a Honda Civic Hybrid. A new Prius starts at $22,175. A 2006 Prius in excellent condition, according to Kelley Blue Book, might carry a retail value of $22,570.
Yep, you read that correctly. The used hybrid retails for just as much as a new one. That's a major drawback of shopping for a scarce or a popular car. You just won't find the same bargains by shopping used.
The fuzzy math of taxes
Let's make the math even trickier. What happens when you factor in other things, like the hybrid car tax credit? That can knock a sizable chunk of change off the purchase of certain new hybrids, but it's not available for used cars. Or, what if you get special financing for a new car, which narrows the cost gap between a new and a slightly used one?
These factors may make it worth your time and money to consider buying new. For the same price, or just a tiny bit more, you'll get a brand-new vehicle with all the bells and whistles you want. Or, it may be time to reconsider whether you need that trendy Mini Cooper after all.
Buyers aren't the only ones who should ponder the nature of depreciation. Sellers should take a moment for reflection, too.
Some related Foolishness for the road:
- 4 Car-Buying Cons
- Foolish Advice on Auto Insurance
- The Best Used Cars: Part 1
- The Best Used Cars: Part 2
Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article. She welcomes your feedback. The Motley Fool disclosure policy drives a convertible.
