You’ve seen or heard the car ads touting “summer clearance” or “year-end sale” that promise thousands of dollars saved if you buy a car now. If that car is last year’s model, however, that deal may not be such a great one, depending on your situation.
As the new model year arrives for each new car, dealers work to clear out their inventories. It’s simply a matter of space—they have only so much room and must get rid of the cars that have been on their lot the longest (currently the 2015 models) to make room for the newest cars (currently the 2016 models.) As a result, these outgoing models get discounted by both the automaker and the dealer, so the savings over the price from even a month before can literally be thousands less.
That savings, however, is essentially because you are buying a car that is already one year old before you’ve even driven it off the lot. That’s easy to forget (or just not realize) when you are buying a car that is the same model year as the current calendar year. In other words, buying a 2015 model in the year 2015—and many dealers will be all too happy to not call it to your attention.
But is a car that is one year old when you buy it really a problem? It could be.
The biggest issue you will face with buying an outgoing model is related to depreciation. As a car ages, its value is worth less, regardless of how few miles are put on it. You’ve probably heard people talk about how a car depreciates dramatically “the moment you drive it off the lot.” That’s because it can no longer be sold as new and is therefore worth less. For a new car that is last year’s model, you are faced with that initial deprecation plus the depreciation of the entire year that it could have been on the road.
Unless you get a great deal, buying last year’s model will most likely keep you “upside down” (where the car is worth less than you owe) for longer. If you plan on keeping the car for many years to come, then you might think this doesn’t matter. But what happens if you need to sell it or trade it in during that time? Or what if it gets stolen or totaled in a car crash? If you are still upside down on your car loan when any of these things occur, you could end up owing money on a car that you no longer drive. Regardless of when you sell or trade in this car (even if it is a decade later), your car will be worth less than if you purchased the same car from the current model year, logged the same miles and kept it in the same condition.
To help ensure you get the best deal, you need to get a feel for the depreciation rate of the car model you are considering. Some car brands, and even certain models in a brand, hold their values better than others. Therefore they depreciate more slowly. A car that depreciates more slowly overall will have a smaller decline in value than a different model that doesn’t hold its value as well.
To find a car’s depreciation rate, check the cost of ownership section of any independent auto information website. Once you know the car’s depreciation rate, you can use it to help you negotiate a better deal. It’s not quite as simple as subtracting the value of the car after one year of ownership, though, since that price also factors in one year of mileage (12,000 to 15,000 miles on average), and the car you will be buying will have very few miles on the odometer. You’ll also need to be careful that there are no other significant changes (such as an entirely different engine or major feature changes) affecting the value of the one-year-old car compared to the new model. Still, knowing the value of the car at one year old is key information in helping you negotiate the best price on last year’s model.
If you don’t have a specific model in mind, an easy way to see the cars that depreciate the least is to look at the 2015 Residual Value Awards from ALG, a firm that specializes in calculating residual values of cars for auto lenders and insurance companies.
The final factor to consider in whether to buy last year’s model or this year’s is whether the car has had a significant redesign this year. Cars that have just undergone a redesign are considered “fresher” and will be more desirable from a resale perspective in the years to come, since those cars will most likely still reflect the current generation of the model when they are sold. Similarly, if the car was redesigned for this model year, last year’s model will be considered even less desirable, so you should expect to see an even steeper discount than if it had not been redesigned.
In addition to steeper discounts, buying the previous year’s model of a car that has been fully redesigned also frequently (but not always) means that you are buying a car that should be nearly free of any major “bugs,” compared to an all-new model, which is more likely to come out of the gate with problems. To find out if this holds true for the car you are considering, check the cars reliability ratings by an independent source, such as Consumer Reports.
If you are reasonably confident you are going to keep your next car for a while, the bottom line on whether to buy last year’s car model or this year’s really boils down to personal preference. If you really prefer one year over the other because of specific features, then that is the car you should buy. Regardless, negotiate the price accordingly so you will be assured that you are getting the best deal.