When it comes to investments, everyone knows the principle of buy low, sell high. But does it work with cars?
The news is full of warnings about Toyota (Stock Quote: TM), which had a massive recall over a sticky gas pedal. Many experts have warned against buying Toyotas until the extent of the problem is better understood.
And many argue it’s also a bad time to sell a used Toyota, or turn one in, because buyers’ worries have depressed resale prices. Car sites Edmunds.com and Kelley Blue Book suggest waiting several months for the worry to dissipate. Edmunds says Toyotas sold at auction are fetching 10% less than they did recently. While Edmunds says that may ease to a loss of 4% to 6%, it could still mean receiving hundreds less on a resale.
Historically, vehicle prices recover after a recall is complete and consumers are satisfied vehicles are safe. In this case, it’s too soon to tell whether Toyotas, generally well regarded until now, will suffer a long-term loss of reputation that could depress resale prices permanently.
On the other hand, some buyers could come out ahead buying new or used Toyotas while prices are down.
The biggest risk of buying now is the possibility that the accelerator problem is only the tip of the iceberg. But there’s no evidence of that so far. Though some worry that quality control has not kept pace with Toyota’s enormous growth, the firm’s vehicles have generally had good ratings from consumers and experts.
Of course, buying a car is never really a matter of buying low and selling high. You inevitably sell for less than you pay. The challenge is to keep that difference as small as possible.
Perhaps the best strategy in this case, as it is generally, is to pay as little as possible and keep the vehicle until it wears out. That means keeping it until it will fetch nothing, or close to nothing, in resale or turn in. But savvy drivers know that the real issue is not a vehicle’s eventual resale value but the cost of driving.
All new vehicles lose value, but not at an even pace. The big plunge comes in the first three or four years, with the average car losing 65% of its value in the first five years, even though it may be drivable for 12 to 15 years, maybe longer.
After the first couple of years, the annual depreciation rate gets smaller. In other words, a car’s value might fall by thousands of dollars between years one and two, but by only a few hundred between years six and seven.
So the smartest play with today’s Toyotas, assuming you want one, is to buy a used model at the depressed price and keep it until it dies. That way, it won’t matter whether resale prices ever recover.
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