I have owned two of this generation of the Volvo XC70. I upgraded from a 2001 to a 2007 to gain electronic stability control, a more powerful and cleaner running engine, and the Haldex AWD. The only reliability problem I have had in the 11 years since my first XC70 was delivered was a bad transmission in the 01. It covered by warranty, and at no point was I unable to drive the vehicle - even once it became obvious the transmission was going (it simply became loud and clunky).
After thinking about it for a long time, I narrowed down my choice of cars to the XC70, Honda Element and Outback. Drove all 3 back to back. Bought the 2007 XC70 with 30k miles for a great price, especially with a trade-in of my 16 year old Toyota 4-runner! I thought there was not comparison between the Volvo and the Outback....I know the Outback has a good reputation, but the XC70 has blown me away (imagine moving from a 1993 4-runner to a 2007 XC70). It is such a joy to drive, and although I can't compare it to other cars in its class, I think it handles and rides incredibly. It is so solid and quiet and the interior is like sitting in your favorite leather chair.
I bought this car with 99,600 miles on it and paid $9,995, capitalizing on its fairly low resale value. Since then, I've put over 31,000 miles on it in just a year. While my fuel economy has not been impressive, especially coming from a 2011 Outback, I have been impressed with what the XC70 has to offer. Mid-way through the first year I was hit with some high repair costs, as a rear wheel bearing, front ball joint and a tie rod needed to be replaced. I was initially upset, but once I got the car back all of the things that annoyed me driving it had been fixed! Sometimes ignorance is not bliss. Who knew? This past summer I was living/working in Montana, and took this thing on countless miles of forest service backroads. It handled things I honestly thought it wouldn't be able too, including an accidental trip on a 4WD only road. If you're looking at this year range for an Outback or XC70, I would recommend the Volvo. You can get a lot more for your money in terms of packaging, material quality and comfort. However, be ready to spend more time as the gas station using premium and the potential for higher maintenance costs. That being said, I have had no real issues in a year and a lot of the maintenance is easy enough to do on your own and save tons of money. Two year update: Somehow this car has gotten better with age. Now with 150K on the odometer, it honestly drives better than the day I got it. I had to replace the rear suspension at the beginning of the summer but with the car being 10 years old and me constantly overloading it, I wasn't surprised. I would 100% buy this car again and am putting off getting a new outback because I love it so much. Go for it!
My current 2007 XC70 is my second; the first was 2004. All prior model year problems (e.g. transmission) seem to have been fixed on the 2005-2007 model years and '07 was the last year before Ford made Volvo cost reduce the vehicle and substitute the problematic Mitsubishi OEM T6 engine for Volvo's bulletproof 2.5T. I now have over 160K miles on this car and my only significant repairs have been (a) timing belt and water pump at 103K as specified, (b) lower control arms at 120k, (c) brake disks at 130k, steering wheel position sensor "clock spring" just done at 148k and other front suspension bits around 160K. Just about to complete a tune up with new plugs and coil packs. Seats still look practically new. The chassis is tight and free of rattles. Even the original struts still doing well, although I've thought about replacing them to tighten up the ride quality a bit. All in all, a very solid and well built vehicle - very comfortable, big storage in back, and tight if not razor sharp European style handling. I particularly admire the 2.5T engine. Torque peak at 1,900 rpm is right at 55mph where you need it for passing. Light boost turbo maintains power at altitude, yet runs nicely on US regular 87 octane gas - unlike Mercedes, Audi, etc. Good sound system, comfortable seats, intuitive controls, great visibility, sure handling, and higher ride height that makes for easier in/out for us older guys plus eliminates annoying scrapes in front while parking (and you don't plow snow with the front bumper unless it's well over six inches. My only niggle with this vehicle is road noise which can be an issue with most aggressive tread patterns. I've finally settled in happily with Pirelli's P7 AS plus, Tirerack's number one rated Grand Touring tire, which is as quiet as they come with crisp handling and commendable grip in all conditions. I've considered a newer xc70, but found that about one in 25 of the six cyl motors experiences excessive oil burn, leading to ring & piston replacement (no cyl wall scoring) or total engine replacement. Volvo dealers might tell you that Volvo offers a 4yr/48K mile extended powertrain warranty if you buy a used unit from a dealer; otherwise, good luck. One curious problem on my '07 that I eventually fixed was when the engine would sputter and eventually and stall when the indicator still reads 1/4 tank - like it was out of fuel. Turned out to be a false high output from the fuel rail pressure sensor. Easy fix anyone with a screwdriver and a rag can do, since the sensor is located on top of the engine. Another age related repair was to replace the upstream oxygen sensor at 170K. Initial code indicated catalytic converter ($$$$), but after running through several consecutive tanks of no ethanol fuel plus Techron additive, the oxygen sensor code came up and that seems to have been the root cause. PS: Easy way to reset the check engine light is to disconnect the battery briefly. Now running on premium unleaded on a long highway trip to finish burning out deposits in the Cat. Finally, if you read the owner blogs Dealers are often referred to as "the Stealership". I've found them capable but very expensive. Could be worse if you have a Mercedes or Audi.