Used Car Buying

Are Used Cars a Smart Investment?

Written By: Ava Roman
Reviewed by: Mike Reyes
Last Updated February 20, 2023

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silver mercedes benz coupe on road during daytime

Over the years, used cars have become more popular with consumers. It’s hard to beat the smell of a new vehicle, but riding around in a two or three-year-old car may be the best choice for you. Also, that used car could be a solid investment. Vehicles are notorious for depreciating quickly. But this guide will outline six reasons why used cars are a smarter investment than buying a new vehicle.   

1. Better Deals

The first advantage of used cars over new ones is the price point. You’re more likely to find a lower price on a used car than a new car of the same model. Used cars are an even better investment nowadays because of supply chain issues and chip shortages.

cIn the past few years, car prices have risen significantly. In August 2022, the price of a new car rose to a record high of $48,301 compared to $43,500 the previous year. By comparison, the average cost of a used vehicle in late 2022 climbed to just over $33,000. 

Used cars have also increased in price. The costs now easily exceed what you’d typically spend for your wedding day. But investing in a used car requires much less money than a new car. One of the reasons is depreciation.  

2. Slower Depreciation 

Looking around your house and garage, you’ll likely find some depreciating assets. One example is your personal computer (PC). Even if it runs well, your computer or laptop will lose value quickly in the first couple of years. Similar logic applies if you buy a new car. A new vehicle will lose value after you drive it off the lot.

After one year, a new car will drop between 15% and 35% of its original value. After three years, depreciation takes away 50% or more of the price you paid for it. Buying a used vehicle is wise because depreciation slows after the third year. You’ll pay a much lower amount of money for a car that is in good condition. Many used vehicles operate just fine compared to when they first rolled off the lot.  

3. Lower Insurance Costs

Another reason used cars are a smart investment is the insurance costs. You may own the vehicle for a few years, so saving money in any area is wise. Used cars tend to have lower insurance costs because the car insurance companies tie the rates to the car’s age. An older vehicle will have lower rates compared to a newer one.

A used car’s depreciation works in your favor because once the price falls, you’ll get a more favorable rate from the insurance company. Another reason you’ll pay less for insurance is the cost of parts. If something happens to your used vehicle, it’s cheaper for the insurance company to pay to repair or replace it. 

4. Long-lasting Vehicles

vehicle driving through empty road

Over the years, used vehicles have improved. A car that’s five to 10 years old now is a much better investment than it was 20 years ago. Many people drove their vehicles for about five years and decided it was time to replace them with new ones. Now, cars are lasting longer. 

Back in the day, cars used to last until the 100,000-mile mark. Nowadays, your used car will likely last until it hits 200,000 miles, and the future is even brighter with electric vehicles (EVs). EVs are steadily rising on the market and will last longer than gas-powered cars. The average EV will typically last up to 300,000 miles. 

5. Public Vehicle History

Some may prefer a new car because they don’t trust what’s happened with the used vehicles on the lot. However, car buyers have the tools to see everything they want to know about the specific used vehicle they want to buy. All they need to know is the vehicle identification number (VIN). The VIN is a 17-digit number you can typically find on the dashboard in the lower-left corner near the windshield.

With the VIN, you can research the vehicle’s entire history. Has anybody stolen the car before? Has a previous owner crashed it? With the VIN, you can see every incident, no matter how many owners it’s had. Another benefit of the VIN is to see recalls. If the manufacturer has recalled various parts, you’ll be able to see it by researching the VIN. The US Department of Transportation (DOT) has a VIN tool you can utilize.  

6. Rising CPI

When you think of investment, you may think of real estate, stocks, bonds and other appreciating assets. But over time, cars have started to become better in their value. One metric you can use to track vehicle value over time is the consumer price index (CPI). This graph shows you how the price of certain items changes over time. Some things fluctuate significantly, but used cars have steadily increased.

The CPI for used cars started low at around 20 points in 1956. But by 1983, the price index rose to above 100 points. In late 2021, used cars jumped to over 200 points on the CPI for the first time ever. The sharp rise came during the height of the supply chain issues. But the trajectory for used cars has primarily gone in an upward direction. 

What does that mean for you? If you decide to sell your car, you’ll get much more out of it today than you would have 10 or 20 years ago. The demand for used vehicles has risen and will likely continue upward for the foreseeable future. 

Making Smart Automotive Investments

There are times when you want to make a financial investment. This venture could be a house, a retirement fund or another asset. One investment you may think about is buying a car. If you’re in the market, use this guide to see why buying a used vehicle is an excellent investment.

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