Everyone knows that cars lose a lot of their value as soon as they are driven off the lot. But few people realize that this fact presents a cost-saving opportunity for the savvy shopper who avoids that initial hit in depreciation. There's a three-year-long "sweet spot" that starts with buying a used car that has already had its initial drop in value and ends with its sale or trade-in before it has another good-size depreciation hit. This used-car "hack" saves you money on the price of the car and lets you enjoy significantly reduced ownership costs.
A Hack for Beating Car Depreciation
Saving Money by Buying in the Used-Car 'Sweet Spot'
A Word About Depreciation
Before showing how the hack works, here's a crash course on depreciation. According to Edmunds data, the first year is the most devastating for the value of most new cars. Take as an example one of the best-selling vehicles in America, the Ford F-150 pickup. It sells new for $50,154, on average. In the first year, the truck depreciates by $14,349, losing 28.6 percent of its value. The next year it loses much less: $2,440, or a 6.8 percent drop in value. The third year is even less painful: The F-150 depreciates by $1,690, a 5.1 percent drop in value.
At the four-year mark, however, the depreciation takes a sharp dip. The truck loses $4,765 of its remaining value, or about 15 percent. Further, at four years of age, most vehicles are no longer covered under their factory warranty and major costs loom: Tires or brakes might need to be replaced, for example. These maintenance costs have an effect on the vehicle's perceived value to potential buyers.
What Is the Used-Car Sweet Spot?
It's the period after the vehicle's first — and most significant — depreciation and the second steep depreciation, which comes around the fourth year. This pattern is fairly consistent across all vehicles. With the same F-150 example, your goal would be to find a 1-year-old used model or a used model from the current model year. (In 2019, for example, you'd be looking for a used 2018 or used 2019 model.) The closer you can get to the current model year for your candidate car, the better.
A 1-year-old F-150 costs about $35,805. Compare that to the new-vehicle price of more than $50,000. If you sold or traded in the F-150 after owning it for three years, it would be worth about $31,675. Your total ownership costs for those 36 months would be about $4,130 or $115 per month. That's one of the cheapest car-buying experiences available.
See Edmunds pricing data
Has Your Car's Value Changed?
Used car values are constantly changing. Edmunds lets you track your vehicle's value over time so you can decide when to sell or trade in.
Which Vehicles Work Best?
This scenario hinges on buying a 1-year-old vehicle, and so one that's certified pre-owned (CPO) fits the bill nicely. Most manufacturers' CPO programs provide excellent, well-kept used cars that have already had their biggest depreciation hit and come with extended factory warranties. Plus, some CPO programs offer loans with subsidized interest rates, which range roughly from 2 to 4 percent depending on the automaker. Such deals are a way to avoid record-high used-car interest rates (currently averaging 8.7 percent), which would eat into the savings for this used-car hack.
Are There Any Downsides?
This used-car strategy may not be for everyone. For starters, you'll need to be comfortable with the shopping process and locating a good used car since you will be starting all over again in three years. Also, assuming you're not paying cash, your credit has to be in good shape to qualify you for the better interest rates. If you choose a niche vehicle that has a limited pool of buyers — an electric car, a convertible or a coupe, for instance — you might have trouble selling it or getting top dollar on the trade-in.
Finally, you can't get too attached to the car and keep it longer than three years or you risk deeper depreciation and maintenance costs, which could eat into the savings you're trying to achieve.