A reader writes in describing a debate she’s having with her husband:
I’m not sure but someplace on your site I think I saw something about how often to trade in your old car. Our SUV is a 2005 with 55,000 miles on it. My husband says its time to trade it in. He says the longer we drive it the worse off we will be. I’m not so sure. We will pay cash for the difference if we trade. Can you give us any pointers?
The husband’s philosophy, if I understand it correctly, is that the older a car is, the less trade-in value it will have – and that’s absolutely correct. An older vehicle will have less trade-in value.
But let’s look at some real numbers. Let’s look at the trade value of Dodge Durangos (they have a SUV, after all) from 1998 to 2006 and assume the median of the range given.
A new midrange 2008 Dodge Durango, according to AOL Autos, costs $31,835. Let’s just assume this is the price one would have paid in earlier years for a Durango. It may have been less, but probably not significantly so.
A 2006 Dodge Durango would have been owned for 24 months and would have a cash value of $18,225. This is a total depreciation of $13,610, or $567 a month for the entire time of ownership.
A 2005 Dodge Durango would have been owned for 36 months and would have a cash value of $14,062.50. This is a total depreciation of $17,772.50, or $493 a month for the entire time of ownership. Over that last twelve month period, the vehicle only depreciated $4,162.50 – or $347 a month.
Let’s keep going for two more years so the picture becomes clearer. A 2004 Dodge Durango would have been owned for 48 months and would have a cash value of $12,500. This is a total depreciation of $19,335, or $402 a month. Even more impressive, over that last twelve month period, the vehicle only depreciated $1,562.50 – or $130 a month.
A 2003 Dodge Durango would have been owned for 60 months and would have a cash value of $10,512.50. This is a total depreciation of $21,322.50, or $355 a month. Again, over that last twelve month period, the vehicle only depreciated $1,987.50 – or $166 a month.
What’s the meaning of this data? The longer you hold onto a car, the less it depreciates each year, and thus the more cost-effective it becomes. A 2003 Durango has a trade value much less than a 2006 Durango, but if you break it down into the depreciation per month, the person owning the 2003 Durango lost much less money per month than the owner of the 2006 Durango.
Another thing to notice is that car depreciation is at its worst during the first few years of owning a car. Thus, to maximize the bang for your buck, your best bet is to buy a model three or four years old. That way, it doesn’t depreciate thousands of dollars each year you own it.
What’s the conclusion? The best value in cars is buying a late model used and driving it until the repair bills start seriously racking up. This plan minimizes the per-year cost of your car and gives you the most years of cost-effective reliability. If you insist on buying new (not the best move), the more years you drive your older car, the more cost-effective your purchase becomes.
Upgrading a three year old car to a new model is not cost-effective in any real way – the only advantage it provides you is the prestige of constantly having a new car at the cost of many hundreds of dollars a month versus using a more cost-effective method of getting around.