How Much Can You Save Buying a Used Car?

The biggest cost of owning a car is the depreciation (the loss in value as it gets older).

Most new cars depreciate 40% to 50% during the first three years of ownership. With an average selling price of around $30,000, that's $15,000 in depreciation cost.

A three year old used car sells for an average of around $16,000 and will depreciate roughly 25% during the next three years of ownership. This amounts to about $4,000 in depreciation costs. A new car not only depreciates quicker, but is twice as expensive to start with.

Before you get too excited about buying used, you should be aware of some of the factors that narrow the cost savings a bit.

First, if you plan on financing the vehicle, be aware that most lenders charge a higher interest rate on used cars - especially if they're older than 10 years or have more than 100,000 miles.

The difference in rates can be as much as 3%, so if you get a car loan with lengthy terms such as 48 months or longer, this can add over $1,000 to your cost when compared to buying new.

Used cars also have higher repair and maintenance costs. Most bumper-to-bumper warranties only cover the first three years of a vehicle's life. You could potentially incur some very large repair expenses. This is why I recommend buying an extended warranty with coverage up to 100,000 miles. This will typically cost between $1,000 and $2,000 depending on the make and model you purchase.

Another thing to keep in mind is the length of time you're planning to keep the vehicle. If you usually keep it until the wheels fall off, one can argue that buying new may be the better option.

Owning the same vehicle for 8 years or longer results in a much smaller yearly depreciation cost than if you only kept the car for 4 years or less - and you have the added peace of mind knowing it's been maintained and taken care of during its entire life, thus minimizing future repair costs.

One last thing - don't assume that all used cars are less expensive than new. Due to the higher demand of used vehicles in recent years, there have been cases where a 1 year old used car costs more than buying the new version.

This is due to the higher cost of financing on the used model coupled with large incentives on the new model. Therefore, if you want to truly save money buying used, you really need to consider a car that is at least 3 years old.