Know the deal on auto depreciation

Question: What 12-letter word would new-car buyers rather not think about?

Answer: Depreciation.

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Question: What 12-letter word should used-car buyers use to their advantage?

Answer: Depreciation.

Depreciation is the decline in a car's value over the course of its useful life. It's something new-car buyers dread. And it's something used-car shoppers need to have a handle on if they want to land a good deal on price.

"It's going to take research if you're going to get the best value," says Lenny Simms, vice president at NADAguides.com.

Depreciation for Dummies
Let's start with some basics. Here's a standard rule of thumb about used cars. A car loses 15 percent to 20 percent of its value each year.

A 2-year-old car will be worth 80 to 85 percent of its 1-year-old value. A 3-year-old car will be worth roughly 80 to 85 percent of its 2-year-old value.

Let's say you have a 1-year-old used car worth $12,000 that loses 15 percent of its value each year. At 2 years old, the car would be worth $10,200. At 3 years old, it would be worth $8,670.

The depreciation in a car's first year tends to be even steeper. A new-car owner feels the sting immediately. A new car loses a big chunk of its value as soon as you drive it off the lot. Here's why.

When purchasing the car, you paid a retail price -- the price a dealer charges for a car.  As soon as you're off the lot, the car is worth its wholesale price, the amount a dealer would be willing to pay for a car should you turn around and head back.

So a brand-spanking-new car or truck loses thousands of dollars of value as soon as you drive it home. Whatever money you spent on taxes and licensing is gone for good as well.

"Just the difference between wholesale and retail prices is a large amount of what goes away right away," says Charlie Vogelheim, editor of Kelley Blue Book.

Let's look at an example. The base price of a brand-new 2002 Ford Taurus is $19,035, according to Kelley Blue Book.

The wholesale price of a 2002 Ford Taurus with just 100 miles on it is $15,390, a drop of $3,645 from its transaction price.  

The wholesale price of a 2002 Ford Taurus with 13,000 miles, roughly a year's worth of driving, is $14,665, nearly 23 percent less than its original transaction price.

Finding the right price
To land the used car you want at the price you want, you'll need to do plenty of research. Start by hopping online.

Edmund's Automobile Buyers Guide, AutoSite, Kelley Blue Book, CarPrice.com and NADAguides.com are among the sites offering timely pricing information as well as shopping and negotiating tips.

The pricing numbers you find on these sites are good starting points.

"No two used cars are alike. Therefore, no two prices are alike," Vogelheim says. "Use our numbers as a guide."

Because auto and truck prices vary by region, you'll also want to consult local newspaper ads and online ads listed by sellers in your area. Online classified sites include AutoTrader.com, Autoweb.com, Cars.com and StoneAge.com.

Brand, model and the condition of a car also contribute to a used car's value. Some brands, such as Lexus, Mercedes, Toyota and Honda, depreciate much slower than other brands. Put another way, these brands tend to hold their value better from year to year.

The same can be said about specific hot-selling models. If brand-new models of a particular vehicle are selling out, you can bet you're going to have to shell out a lot for a 1-year-old model with low miles.

As for the condition of the car, you'll pay more for a low-mileage, 2-year-old car that smells and shines like new. The same model with high-mileage, dings and scratches on its exterior and stains on its back seat would cost you quite a bit less.

You'll want to be just as diligent in securing financing for a used car purchase. It's best to shop around for financing before hitting a dealer's lot. This search engine from Bankrate.com will help you compare rates in your area.

Credit unions, in particular, offer some excellent rates on used cars. By shopping ahead, you'll learn what kind of financing deals you qualify for. The dealer won't be able to talk you into signing on for a loan with a higher interest rate than you deserve. And he may knock down his own rate to earn your business.

"Right now it's pretty easy to be a smart buyer," Simms says. "Prices are down. Interest rates are good."

If you plan to sell a used car after a couple of years you may want to choose a model that retains its value well. You'll pay a little more for the vehicle upfront, but you'll also be able to charge a little more when you sell it.

Best used cars to buy
People who are looking to buy a used car and plan to keep it for several years should focus on vehicle durability. You'll want to avoid vehicles with a history of lengthy repairs.

"If you plan on keeping a used car for a long time, how long it keeps its value doesn't really matter. You're worried about how well it runs mechanically," says Remar Sutton, author of Don't Get Taken Every Time and president of Consumer Task Force for Automotive Issues.

The Web sites of J.D. Power and Associates and Consumer Reports include listings of used cars that have performed well in reliability studies.

The Center for Auto Safety lists common defects and problems on a wide range of cars and trucks on its Web site.