The automotive industry is one of the most misunderstood industries today.
Most people, maybe even you, have some startling misconceptions that need to be dispelled once and for all.
Most people simply do not understand how the used vehicle market works and how it actually makes up a very large percentage of total car sales worldwide.
If you’re not at the very least, familiar with it, then you’re missing out on the great benefits that this market has to offer, whether be it financially or performance-wise.
This post is all about educating you on just how the market works. You’ll be surprised to find out that buying a new car, as opposed to a used one, does not make any financial sense, even if you plan on writing off that lease.
What exactly classifies as a ‘used’ car?
Most people think that used cars are low quality, which is why they sometimes refuse to buy them.
This cannot be farther from the truth.
Just because a car has been “used,” doesn’t mean that it has been abused.
And you can take that rhyme to the bank.
As a matter of fact, there are almost always new model cars available on the used market. The dynamics of the used car market has changed dramatically over the years and it cannot be compared to what it was 10 years ago. We’re here to help you understand what has changed.
All in all , if you don’t know how to navigate these new waters, you’ll risk being played by the people who do know how and who will use every opportunity they can to either get the car of their dreams or make a quick buck at your expense.
How does pricing work in the used car market?
It is important that you understand the elements of these new waters in order to navigate them, and one of these key elements which can either lead to dealers surviving or perishing when playing in this field, is pricing.
As soon as a car leaves it lot, it is automatically considered a ‘used car’ and will lose approximately 20% of its value – and that’s before the car has even traveled one mile!
It the sad truth, but that new car you just bought straight from the lot will continue depreciating in value no matter what you do.
This is why we don’t ever recommend buying new cars, especially when you find out that you can get the exact same car for a steep reduction in price by just being patient and waiting for the right moment.
The right moment, or moments in this case, are the 3 major value drop-offs.
The 3 Major Value Drop-offs
Every new car that is bought straight from the lot will go through what I call the 3 major value drop-offs, which leads to its overall pricing inevitably decreasing as time passes.
If you know just what these drop-offs are, and when they’re going to happen, you’ll understand why we don’t recommend coming close to a new car on the lot, and instead, saving a ton of hard-earned cash by buying a used car instead.
Major Drop-off #1 – Dealer Rebates
Essentially, when new car models come out that are identical or slightly improved from the previous model, dealers offer incentives on the older models left unsold in order to get rid of the old stock, which makes them way more affordable.
For example: Somebody buys a brand, spanking new Mercedes for $75,000, when it is fresh and everyone wants it. However, later in the year a few models in inventory are left on the lot while the dealer has already received this year’s, new models.
In order to get rid of inventory that is depreciating, the dealer offers incentives backed by the manufacturer, such as 0% financing or cash rebates as high as $20,000. With this principle in mind, just imagine what the value of 1 year old car would be. In a matter of 1 year, you would have lost almost 40% of the value of your car, and the mileage you had put on it, whether average or low, will simply not matter much.
This is how the same car that was once $75,000 can drop to $55,000 within a limited time frame, and you’ll simply be missing out if you don’t capitalize on this often-overlooked opportunity.
Major Drop-off #2 – Lease Returns
Although most people believe luxury and exotic cars are all paid for in cash, that is simply not true. Most cars are leased, which means after 24 – 36 months, the market becomes flooded with an inventory of same year cars across dealers nationwide.
This creates a very competitive market for consumers because the selection of used cars increases at the same time as demand decreases. A consumer who wants a particular car that is 36 months old will have plenty of choices on the market to choose from. As a result of this increase supply, the customer will have much more room and flexibility to negotiate on pricing.
Major Drop-off #3 – Warranty Expiration
The last major price drop a new car goes through is when the original 3yr/36k mile or the 4yr/50K mile warranty expires. No person in their right mind would buy a luxury car that can cost up to thousands of dollars to fix after the warrant expired.
Because of this, the demand for these cars becomes even less, which in turn makes the price plummet once again. In most cases, you can find a great independent mechanic to help you find a car in great shape. However, finding a great mechanic is an article all in itself. Coming soon!
Minor Drop-offs – The Banks
There is one final, but smaller, price drop that occurs with most cars and it happens particularly at the 5 year mark. At this point, the car has aged to a point where banks no longer want to finance it. The risk is greater, the warranty has expired, the car is now completely depreciated and, frankly, the banks don’t like that.
Because of this, cars over 5 years old are normally only available to cash buyers.
Newsflash: Most people are NOT cash buyers, which leads to the demand and in turn, its value, dropping.
Now that you understand how a new car turns ‘used’ and what drives the car down in price, reflect on why we strongly encourage you to buy used cars instead of new ones. How much money could you save if you actually bought the car right after the lease ends with low miles, some warranty left for peace of mind, and in an immaculate condition?
Could you save about 60% just by waiting for another 2 years? By then, you could enjoy the best of both worlds – the excitement of a quality car and the piece of mind of not breaking the bank to get it.
Compare that to buying a new car right off the lot; sure it may look fresh and new for a moment, but it has nothing but a depreciating price tag attached to it.
Learn the rules so that you can break them and control the game like a pro.