Hello readers, I received this car buying question today: Basically the gist is whether it is a good idea to buy the incoming model year vehicle or the current (or last years model). The answer to this depends on your reasons for buying a new car and how you plan on paying for this purchase.

The question asks if the current model year, in this case the 2009, is a year old. The answer to this is very simply, YES. As far as any lender or leasing company is concerned the car is a year old the moment a new model year is available. Lets talk a little about leasing for a moment since this will illustrate the concept better. A component of the lease is the residual value. The residual value is the estimated value of the vehicle at the end of the lease. This value is determined by the leasing company and is non-negotiable. The higher the residual value, (or the less value the car is expected to lose) the lower the payments.

Since the new model year is available sometime during the previous calendar year (i.e. 2010 model bought in 2009) a new car bought in the beginning of the model year is worth more than one that is bought at the end of the model year (since the new one is coming out). What happens is that as the model year progresses, most leasing companies will reduce the residual value for newer auto lease contracts. So if you take a percentage of the estimated first years depreciation and divide that over a year that would be about the reduction of the residual value. The percentage used varies by leasing company.

So, the difference in the residual value between a new car bought at the beginning of the year and the end of the model year could vary by thousands. This often means that you can lease a new model for less than you can the older model. Tricky huh.

Okay, so back on track. The above long-winded explanation was designed to show you that lenders and leasing companies believe and are willing to bet that the value of a brand new 2009 is thousands less than the 2010 sitting beside it, even if there have been no feature or design changes. If there is a redesign, the difference may be staggering.

In my opinion there are very few instances when it makes financial sense to buy the outgoing model. Especially in an economy like we are in. The fact is that the invoice price (or whatever the dealerships true cost is) does not decrease with time so the question becomes how much are they really willing to lose to sell that car. Most of the time it is no where near the amount the new car has depreciated over the year. This means you are in a lose lose situation, and the one with better information loses less - usually the dealer.

NEGOTIATION TACTIC: Ask them to pull a used car booksheet on the exact car you looking at with 12,000 miles on it. This is a HIGH estimate of what you should pay for the car. Watch how fast the switch you to the new model and then wait for a less savvy buyer to take the older model for a few hundred dollar discount (that they would have gotten anyway on the newer model). Why do I say compare it to a used car with 12,000 miles? I realize this car is new - you are taking a page from the dealers trade-in playbook. They will never, never give you value for low mileage on a new car, but you can be sure they will ding you hard if you are over mileage. You are basically trying to get a best estimate of what the value is of the car if you were to try to sell or trade it immediately. If you can get close to this price than go for it, maybe.

An additional thought: Remember that if you are financing the new car you are looking at the loan balance decreases much slower than the value of the car. So if you are financing a car that is a year old, you are much farther underwater during the loan than you would be with a newer model. Don’t start any farther behind the 8-ball than you have too.

My final opinion, and I can only speak for myself. I would never buy or lease the outgoing model year. It is a bad financial move. The best thing to do if you want to buy the old one to get a great deal, find a private party selling it and buy it from them using the negotiation tactic above. Unfortunately, the truth is they are likely so far upside down on the car, they couldn’t afford to sell it to you for the real value. So back to the new 2010.

I welcome all feedback and comments. Thanks for reading.

I received a great question from Dan today.  Dan asked whether GAP insurance is a good idea.  Before we get into the question at hand I will take this opportunity to explain what GAP insurance is. I have seen several acronyms for what GAP stands for, but it really is just that, insurance that bridges a gap. When you buy a new car the value of that vehicle is negatively impacted the moment the registration application is processed. It is often said that the vehicle loses value as soon as you drive it off the lot. While the sentiment is true, the reality is that the car becomes a used car the moment the car is titled. So technically that drop in value doesn’t occur instantly. But I digress. (more…)