Sweet Deals on New Cars

If you’re in the market for a new car, now is a great time to shop. The recession, credit crunch and uncertainty surrounding the auto industry have left dealers stuck with inventory and eager to move cars off their lots. Add in end-of-year and January clearance sales and you’ve got a genuine buyer’s market.

“If you need a car and have the cash or can get the financing, now is probably one of the best times to buy,” says Jesse Toprak, executive director of industry analysis at Edmunds.com. Dealers still have a lot of 2008 model-year vehicles, and discounts are as generous as they’ve been in recent memory.

The deals got even better when GMAC, now recognized as a bank holding company and flush with $6 billion from the Treasury department, recently introduced zero-percent and low-rate loans on GM cars and expanded its lending to buyers who have less-than-stellar credit -- those with FICO scores as low as 620.

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The lowest rates are reserved for buyers with good credit. Leasing deals for many models are history, although you’ll still find subsidized leases from Acura, Audi, BMW, Honda, Infiniti, Mazda, Mercedes-Benz, Nissan, Subaru, Toyota, Volkswagen and Volvo.

If you have dings in your credit, you may need to come up with a bigger down payment and pay a slightly higher interest rate on a car loan.

Cash rebates are also prevalent. For example, the Chevrolet Red Tag sale features a $1,883 discount on the 2009 Malibu and $2,239 on the brand-new Traverse crossover SUV. Chrysler is offering $1,500 cash on the 2009 Dodge Grand Caravan and $1,000 on the Jeep Patriot, and Ford is offering $2,000 on the 2009 Fusion (for the latest incentives, see Edmunds.com).

When you must choose between low-rate financing and a cash rebate, it’s generally better to take the rebate if you plan to trade in the vehicle within three years (run the numbers using our calculator).

Buy last year’s model?

Some of the most generous offers are for 2008 models (for example, $8,000 cash back on the 2008 GMC Yukon, $6,000 on the ’08 Chevy Equinox and $5,000 on the ’08 Kia Sorento). In addition to bigger rebates, you have a bigger selection of low-rate financing:

-- 0% to 7.9% financing for up to 72 months on the 2008 Chrysler 300, 2008 Chrysler Town & Country and 2008 Dodge Ram 1500.

-- 0% financing for 36 months on the 2008 Ford Escape, 2008 Ford Focus and 2008 Ford Fusion.

-- 0% to 2.9% financing for up to 60 months on the 2008 Toyota Highlander, 2008 Toyota RAV4 and 2008 Toyota Yaris.

-- 1.9% to 3.9% financing for up to 60 months on the 2008 Honda Accord and 2008 Honda Civic.

But run the numbers before you purchase a 2008 model because it’s not always the smartest buy. In fact, unless you get a big enough discount on the '08, you'll likely come out ahead buying an '09 model.The reason is depreciation. As they've sat on the lot, the 2008s have bled resale value. However, if you tend to drive the same car until it sputters and dies, you’re better off buying the discounted 2008 model because you won’t need to worry about depreciation.

You could also come out on top with a 2008 model if -- through incentives, dealer discounts or your negotiating skills -- you can erase the depreciation gap.

In general, the lower the price of the vehicle -- and the longer you keep the car -- the narrower the depreciation gap between newer and older models. A difference of $1,000 after three years is typical for vehicles under $30,000; after five years, figure on $500. For $40,000 vehicles, the spreads are closer to $2,000 for three years and $1,500 for five. If the combination of incentives and the discount you negotiate for the 2008 beats the gap -- and you love the color -- drive the older model off the lot.

When newer is better

Some new models may include once-optional equipment as standard, which adds value to new vehicles without raising prices much. If the new model is a total makeover, comparisons no longer apply. Redesigned models don't just look different; they usually have powertrain and interior improvements that boost quality.

For example, a newly redesigned 2009 Acura TL has a three-year resale value equal to 52% of the sticker price, according to Kelley Blue Book. But the old-generation yet still-new 2008 model is expected to be worth only 43% of its sticker price after three years. The 2009 costs just $1,230 more than the 2008, but after three years it could be worth nearly $3,675 more. In other words, to save $1,230 now, you'd surrender $3,675 at trade-in time -- a net loss of $2,445.

Run the numbers yourself to compare any 2008-versus-2009 deal. The resale value, also known as the residual value, is hard to come by (Kiplinger's publishes resale values once a year, in the March issue). But dealers should be willing to share up-to-date figures that they get from leasing companies for three, four or five years down the road. Multiply the resale-value percentage by the sticker price to see what the vehicle is likely to be worth to a dealer when you're ready to sell.