As auto show season shifts into high gear, dealerships are offering big savings on existing inventory. Outgoing models that are priced to roll are a great opportunity for bargain hunters, assuming they understand the trade-off in depreciation. But is the end of the year the best time to buy a new car?
New Car or New New Car?
Philip Reed, consumer advice editor for Edmunds.com, explains that a 2007 model will depreciate faster than a 2008 car, especially if that vehicle is undergoing a major redesign.
Manufacturers update models about every five years, and typically do a refresh mid-cycle. Model updates can include new engines, safety technology, comfort and convenience features and restyling. A refresh isn't as extensive, but still impacts the amount that the outgoing model will depreciate.
Buyers should also consider how long they plan to keep the car.
"Typically, a vehicle effectively devalues after about seven years," said Reed. That doesn't mean that the vehicle has no value to its owners; simply that its resale value has reached the lowest point.
People who typically keep a car five-to-seven years versus two-to-three will feel less impact from depreciation at the time of purchase. Reed also points out that the older a vehicle is, the more upkeep and maintenance affect its resale price.
Since end-of-the-year discounts apply only to cars on the lot, buyers may have to settle for a higher trim level, options they don't need, or a color they don't like. Option packages can add thousands of dollars to a vehicle's base sticker price, offsetting the value of rebates and incentives.
Lease or Buy?
"Are you a car person? If so, leasing may be good for you," says Reed. It allows car enthusiasts to conveniently rotate through new models more frequently than if they were to buy the cars outright.
Leasing can also be a boon to people who use their cars for business: real estate brokers are a good example. Consult a CPA about current tax laws, and how they impact tax deductions for leased cars.
Despite the financial incentives, leasing is not for everyone.
"The sweet spot of leasing is two to three years," Reed explains. "You don't want to go much longer. For example, if a buyer leases a car for four years, he is making pretty large payments, at the end of which he has no return on his investment."
Car shoppers considering leasing should read the fine print. Mileage caps and other penalties can add up when the car is turned in. A car enthusiast planning to modify the vehicle may have to reverse the modifications at his expense.