Historically, the value of a car plunges the minute it leaves the lot and falls further with every additional mile. The current trend, then, has car owners and dealers scratching their heads: Many used cars have stopped losing value and in some cases, they're actually worth more now than they were a year ago.
Last month, used-car values spiked 16% compared to a year earlier, according to RVI Group's Used Car Price Index, which compares existing used-car models to the same used models that were sold in previous years with similar mileage. And those higher prices are occurring across a wide range of cars. A 2008 Ford Focus S sedan with 35,000 miles, for example, would have sold for $7,525 in May 2010, according to Kelley Blue Book; this month, a seller could reasonably expect $9,600. A Hyundai Elantra SE sedan and a Toyota Prius hatchback from 2008 with the same mileage can now fetch $10,700 and $17,950, respectively, up $1,400 and $4,650 from last year. And prices should remain high for at least the next three years, says Rene Abdalah, vice president at RVI Group, which insures leased car values.
One big reason for the used-car renaissance: limited supply. During the recession, consumers bought fewer new cars sales dropped to about 10.4 million in 2009, down nearly 40% from 2005, according to Ward's Automotive Group, which provides automotive industry data. Today, that means fewer late-model used cars to sell. In addition, drivers are keeping their new and used cars for about nine months longer since the third quarter of 2006, or nearly 4.5 years on average, according to third quarter 2010 data from Polk (the most recent data available). As a result, there were about 22 million used cars on the market last year, down around 4% from 2009 and the lowest number in a decade, according to ALG, which tracks residual values.
For car owners who are ready to sell, the current market conditions provide several options, including finding a buyer willing to pay close to current market value. That's not so far-fetched, especially for fuel-efficient cars, which are in high demand, says Alec Gutierrez, manager of vehicle valuation at Kelley Blue Book. With gas prices near a three-year high, consumers have become increasingly interested in compact cars and other fuel-efficient vehicles that can save them money at the pump, say analysts. Indeed, for every $1 increase in the price per gallon of gas, the value of used compact cars rises 8% to 12% on average, according to ALG.
Granted, selling a used car today won't necessarily turn an easy profit. Value still largely depends on the car model and its condition. Even highly-desirable cars with low mileage aren't likely to be worth more than the owner paid they're just likely to be worth more than they would have been a year or so ago. And, of course, if there's not a good reason to sell, the strategy falls apart. Even in this market, there are perks to holding onto a car, particularly for owners close to the end of a car loan.
But for consumers looking to sell, here are three options for making the most of a car's value.
Work the private market
As in years past, consumers who sell their car to a private party have the best shot at unloading it near or at its current market value; trading in a car at a dealership often knocks 5% to 10% off the price, says Jesse Toprak, vice president of industry trends for TrueCar.com. But now, sellers stand to gain even more by selling to private parties, thanks to the "exponentially higher" prices for certain used models that are in demand, he says.
Still, selling a car on your own does require time and effort. And in some ways, it's harder to do now than it was pre-recession because fewer lenders are willing to finance used cars sold by private parties rather than dealerships, says Toprak. That's partly because lenders trust dealerships to review a car's condition and to make sure it's reflected in the sticker price. To avoid wasting time with an unqualified buyer and to maximize the chances of executing a sale, sellers should ask interested buyers whether they're planning to pay in full with cash; if not, they should ask buyers if they've been preapproved for a car loan and if they can provide the bank's preapproval letter. To reach more buyers, sellers can consider listing the car on web sites like AutoTrader.com or EBay Motors. They can also consult a car-market-value guidebook, like Kelley Blue Book, which lists how much car models are currently worth.
Trade in for a new car
The quickest, easiest way to unload a used car is to trade it in at a dealership. While car owners will probably get less than they would in the private market, they'll still likely receive more than they would have a year ago, says Gutierrez of KBB. Because of limited used-car supply, some dealers are "more willing to cut into the potential profit margin," he says. Sellers can use the money the dealership offers them as a down payment on the car they're planning to buy. Someone who traded in a 2008 Honda Civic with 41,500 miles last month could have fetched $12,200, according to Kelley Blue Book. That's $3,500 more than what a seller could get for trading in a 2005 Honda Civic with the same amount of miles in April 2007.
Drivers about to come out of a lease are also in good shape. In many cases, the so-called "residual value" the amount a dealership estimates the car will be worth after the leasing period -- that a dealership placed on their car when they signed up for the lease is lower than the current market value, says Gutierrez. Before the lease ends, borrowers can visit competing dealerships to find out how much they're willing to pay for the car chances are it will be several thousand dollars more than what you'd pay to purchase the car after the lease. And that difference can be used as a down payment on a new car.
Keep the car
Despite the favorable conditions for sellers, there are also compelling reasons to keep the car you have. For starters, if it's a relatively recent model, it may be a decent car: There's been a 5% average annual decline in reported car problems between 2006 and 2009, according to a 2010 study by J.D. Power and Associates. Cars also appear to be holding up longer. The average age of cars on the road was about 11 years last year, compared to 8.4 years in 1995, according to Polk. Cars are being made to last longer, says a spokeswoman at CarMD.com Corporation, which specializes in car repair products and information, and car owners shouldn't encounter pricey repairs before the first six years assuming they stay on top of maintenance and don't ignore warning signs (like the "check engine" light).
Another advantage is avoiding financing, which most people don't do. About 70.5% of people finance their cars and 18.5% lease while just 11% pay in full with cash, according to CNW Marketing Research. Rather than buying another car and financing it, drivers who keep their car for the long run can avoid paying interest on a depreciating asset or incurring any fees that are tacked onto sales contracts.