Thinking about putting a set of car keys under the tree this year? Consider a used car. It might not have the same cache on Christmas morning, but it's a much smarter financial move.
New cars typically depreciate the minute you drive off the lot. By the time it's a year old, the vehicle has lost nearly one-third of its value, according to Edmunds data.
"The sweet spot is to buy a car that's 2 years old," said Scott Tucker, president and founder of Scott Tucker Solutions in Chicago. "It's done quite a bit of depreciation yet the repair costs will still be relatively low."
And more car shoppers are wising up to this cost-saving opportunity. In fact, 2016 is on track for a record number of preowned sales. For the year, almost 41 million used vehicles are expected to be bought in the U.S., according to Cox Automotive, with December slated to be a particularly strong month for sales.
With more used cars on the market, there's a lot of variety and competition, and that's good news for car buyers, said Bill Kearney, president of Integrated Financial Concepts in Mooresville, North Carolina. Plus, concern over ending up with a lemon have been minimized thanks to sites like Kelley Blue Book and Carfax, he said.
The financing question
Still, even if they're not brand new, buying a car means racking up a substantial amount of debt. More than 33 percent of American households are making car payments, according to a Pew Charitable Trusts study, with over $1 trillion in auto loans now outstanding.
For an average auto loan, which is over $30,000, payments are about $500 a month, according to credit monitoring firm Experian, which tracks automotive loans.
For those currently car shopping, the rate you'll pay to finance a purchase varies widely, depending on factors including your credit and where you borrow. (See chart above.) The four-year used car loan rate is 4.89 percent, according to Bankrate, but could be as low as zero percent for those with excellent credit.
Experian also recently reported a surge in used vehicle loans being written to people with the best credit scores.
At the same time, lenders are loosening their standards and letting some borrowers take on more debt than they can afford. Subprime lending, which is more profitable because lenders can charge much higher interest rates, has led to a recent increase in the number of Americans falling behind on their car loans, according to the Federal Reserve Bank of New York.
There could be a better way. Tucker advises consumers to buy as little car as possible and aim to pay cash rather than finance the purchase at all. "It's not easy," he said, but resist the urge to keep up with the Joneses, as "the Joneses are broke."