Buy a 2006 Car on Sale?

Carmakers' incentives on 2006 cars may tempt you to skip the 2007 models just coming into showrooms. At first blush, it seems like a smart financial move. You get the same warranty and the same new-car smell. But it could be a mistake: Unless you get a big discount on the '06, you'll likely come out ahead buying an '07 model.

The reason is depreciation. As they've sat on the lot, the 2006s have bled resale value. For example, in July a 2007 Ford Mustang GT convertible had a three-year resale value equal to 63% of the sticker price, according to Kelley Blue Book. But a new 2006 model was expected to be worth only 58% of its sticker price after three years. The 2007 costs just $160 more than the 2006, but after three years it could be worth nearly $1,700 more. In other words, to save $160 now, you'd surrender $1,700 at trade-in time.

This isn't an exercise in crystal-ball gazing, but a tried-and-true fact of auto economics. Here's an example from the recent past: If you bought a 2003 Mercedes-Benz C240 three years ago just as the 2004 models became available, you would have saved $1,755 over the newer model. But if you traded it in today, you'd get $2,700 less, according to average prices dealers pay.

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When older is better

If you can get a low enough price for a 2006 model -- through incentives, dealer discounts or your negotiating skills -- you can erase the depreciation gap. For example, the 2007 Chevrolet Equinox LT has a sticker price $275 higher than the 2006 model and is expected to be worth about $1,500 more after three years.

So if you go with the '07, you should be ahead by $1,225. But recent sales data show that the 2006 is selling for about $1,100 less than sticker, which means you're really ahead by only $125. If you negotiate an extra $125 or more off the sticker price, the 2006 is a better deal.

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. If you don't care about resale value because you plan to keep the car until it sputters and dies, buying the older model at whatever discount probably makes sense, says Jack Nerad, executive editorial director of Kelley Blue Book.

Another factor: Some new models may include standard equipment that used to be optional, which adds value to new vehicles without raising prices much. For example, Chevy made stability control, which helps prevent skids, standard equipment on the 2007 Equinox.

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.

Mind the gap

Run the numbers yourself on any 2006 versus 2007 model. The resale value, also known as the residual value, is hard to come by (Kiplinger's publishes resale values once a year, in the December 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. Or simply estimate the gap.

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 2006 beats the gap -- and you love the color -- drive the older model off the lot.

Got a question? Ask Mark at kiplinger.com/drivetime, or write to him at 1729 H Street, N.W., Washington, DC 20006.