Consumer Reports Analysis: Buying a Late Model Used Car Can Save Thousands Over the First Five Years

A new Consumer Reports study of owner costs shows that choosing a reliable three-year-old car instead of a new one can save drivers thousands of dollars over the first five years. In many cases, that's enough to pay for all the gas used during that time.

With relatively low mileage, modern safety and convenience features, and usually a much lower price than similar new vehicles, late-model used cars are in the sweet spot of auto deals.

On average, CR's findings show that consumers can save 32 percent in the first five years by buying a three-year-old car. Similarly, with a one or two-year-old car, they can save 19 and 27 percent, respectively.

According to the analysis, buying a 2005 Toyota Camry with a V6 engine, for example could save consumers about $13,000 over five years compared with buying a new 2008 version. At $4 per gallon, the driver could pay for all of his or her gas during that period (based on driving 12,000 miles per year) and still be almost $2,500 ahead.

Similarly, driving a 2005 Ford Focus can save more than $8,000 over the first five years, compared with buying the new Focus. And with demand for big SUVs plummeting and their used-car values dropping, drivers could save $25,500 over five years by buying a three-year-old Chevrolet Tahoe instead of a new one.

CR's five year owner costs are based on: Depreciation --- Calculated by using CR's Auto Price Service. Fuel costs --- $4 a gallon for regular gas and $4.20 for premium, based on driving 12,000 miles annually and CR's overall fuel economy for the vehicle. Insurance --- The cost of insuring an average driver based on data from the Insurance Institute for Highway Safety. Interest --- CR assumed buyers purchased cars with a 15 percent down on a five-year loan; http://www.Bankrate.com was the source for the average interest rate. Maintenance and repairs --- Data was taken from CR's 2007 Annual Auto Reliability Survey. Sales tax --- Calculated using the national average at the time of purchase.

"A reliable late-model used car can be one of the best values out there when buying a car," said Rik Paul, automotive editor, Consumer Reports. "Savvy shoppers can also get a more upscale model with more features for the same owner cost as a less expensive new car."

The full report is available in the redesigned October issue of Consumer Reports, on sale September 2 on newsstands and online at http://www.ConsumerReports.org.

Why used cars are good values

The real key to used-car savings is depreciation, or how much value a car loses over time. On average, depreciation accounts for a whopping 45 percent of a new vehicle's owner costs over the first five years, with the steepest drop in value coming in the first year.

By contrast, a three-year-old vehicle has already taken its biggest hit in resale value. Its depreciation accounts for only about 25 percent of its five-year owner costs. Big depreciation for new cars means lower prices for used cars, which in turn mean lower finance charges and sales tax. When combined, that can cut owner cost dramatically.

However, CR found that some popular models such as the Mini Cooper and Toyota Prius don't depreciate much. So buying a used version of those models results in modest savings.

Many people shy away from buying a used car because they're afraid of buying someone else's problems. Yet CR's reliability data show that cars, overall, are much more reliable than they used to be. Rust and exhaust-system problems, once common in older cars, are no longer of major concern. And reliable late-model vehicles usually have few problems overall. That said, if a car hasn't been well-maintained, reliability and value are wild cards.

To check reliability predictions, visit http://www.ConsumerReports.org/cars.

Bottom Line

While most used cars on the market are five years or older, it's worth looking for late-model used vehicles that are three years old or less. Drivers can often find a late-model used car with many of the latest safety features, such as electronic stability control and side and curtain air bags. It's even possible to find one with a transferable factory warranty.