There are certain people who seem to have X-ray vision, who can look at a business and see things that are invisible to other people. I bring this up because I have a friend who spotted something about used cars that I have never heard addressed by anyone else.
Darrell Parrish, who wrote three books on car buying, told me there was a way to drive a nearly new car every three years almost for free. And he wasn't talking about leasing, either.
He pointed out that cars depreciate very quickly when they are first sold. Drive a new car off the lot and it can lose 20 percent of its value. Everyone knows that, right? So where's the secret?
What Parrish discovered was that there are certain types of cars that hold their value at a mostly constant level for three years. Then, in the fourth or fifth year, the value begins dropping off more steeply again. What this means for you, the savvy consumer, is that you can drive a (nearly) new car for (almost) free.
Furthermore, if you combine this concept with a sharp eye for the market you'll make out like a bandit. Currently, the used car market is very soft. You could get a great deal on a two-year-old creampuff, drive it for two years and then, when the market improves, reclaim most of your money.
If you want to see proof of this little car-buying secret, you have to look no further than Edmunds.com True Cost to Own. Pick a car and look at the depreciation from year to year. At first you will think that the depreciation is constant. However, the percentage depreciation is actually accelerating since more loss is detracted from a smaller total value.
Let's take a breather for a minute and look at what we have. There is a huge drop-off when you first buy a car. Then the depreciation isn't too scary in the second, third, fourth and fifth years. But once the car is five years old, the value "drops like a rock," said a longtime used car dealer.
While this drop doesn't look severe in the grand scheme of things, it is a well-known fact among car dealers. A longtime used car bargain hunter was asked if there was a second drop in a car's price. "Oh yeah," he answered without hesitation. "It's really true in the high-end American cars — the Cadillacs, Lincolns and Chryslers."
To understand the reason behind the second drop you have to look at where a car is in its fifth year. If the car has been driven for 12,000 miles each year, there are 60,000 miles on the clock. At 60,000 miles, if the car has been babied, it still is comfortably below the 100,000 mark. However, there are some rather major service issues looming such as the replacement of timing chain, another set of tires and the slow oxidation of the paint job. (Buying tip: Make sure to ask for valid service records on any car with about 60,000 miles to see if this work has been done.)
Why should you care about this? Well, here's the good news. And here's why I made you sit through math class. If you buy a car that is one or two years old, and drive it for three years, you can sell it for close to what you bought it for. In other words, you can let someone else get hit by the depreciation at the beginning and the end of this car-buying cycle. And you can drive it while it's on that flat spot on the graph.
Let me put one other factor into this mix. The used car market goes up and down like a roller coaster, a bit like the real estate market. If you find yourself in a buyer's market, drive a hard bargain for a good used car. Then you are ahead of the game from the beginning. Baby the car and put it up for sale again in a few years. You may find that you've had the pleasure of driving a (nearly) new car for (almost) free.
Not all cars age at the same rate. And the condition of a used car is still the most important factor. But if you can forego the new car smell, and head for the used car lot, you can put your money on something more stable — like a sure thing at the race track.
To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.