To save, go with a used car

Q. Your recent list of money-saving tips suggested that people buy used cars instead of new. How much can you save and how do you know the car's not a lemon?
A. Most columnists have bees in their bonnets, and cars are one of mine. To me, the automobile industry is more about fashion than transportation, and too many people buy new cars to keep up with the Joneses. Over a lifetime of car ownership, the cost can be enormous -- forcing many serial new-car buyers to delay retirement for years.
One of the chief problems is that a vehicle's rate of depreciation -- its decline in value -- is greatest in the early years. Today, a new Ford Taurus sedan goes for about $20,000, while a 1-year-old model with 12,000 miles on it will fetch only about $15,000, according to Kelly Blue Book, the car-buying guide, available on the Web at http://www.kbb.com/.
A comparable 2-year-old Taurus is worth about $13,000, a 3-year-old $11,000, a 4-year-old about $9,500. By the time you get to 10- and 11-year-old models, the annual depreciation is only about $250.
Obviously, the more often you buy a new car, the greater your total loss to depreciation.
But there's more to it. Since new cars are more expensive, they cost more to insure. Even though used cars can cost more to maintain, it's cheaper to go the used-car route -- or to take the middle path, buying new and keeping a car until it dies.
Calculating this involves a lot of assumptions, of course, but a good analysis is offered on the Web site of Edmunds.com Inc., an online vehicle-pricing service at http://www.edmunds.com/.
Edmunds looked at the total cost, including monthly payments, insurance, maintenance and licensing for a $20,000 new car kept for five years and sold for $7,000. Ownership costs totaled $25,388.
The driver who purchased a comparable used car for $10,000 would reduce that five-year cost to $16,390, assuming the car sold for $2,000. (Cost of leasing, by the way, was highest, at $32,140.)
Annual savings
This means the annual saving by going the used-car route averages about $1,800. If you invested that much every year over a 40-year car-ownership period, you'd end up with $527,000. (That assumes a 7-percent annual investment return and that you boosted the investment by 3 percent a year to counter inflation.)
After 40 years of inflation, your $527,000 would be worth $162,000 in today's dollars -- enough to cover most people's retirement expenses for several years at least.
The problem with buying used is you don't know how well the vehicle has been maintained. But this is less a problem today than in the past.
Checking used cars
A number of online sites, including those mentioned above, provide lemon reports originating from Carfax Inc., a company that collects publicly available records of wrecks, lemon complaints and other problems. Data is assembled, for example, from vehicle registrations, emission tests and accident reports.
You can find out for free whether a vehicle has a blemish on its history and get the details for $19.99.
There's no guarantee Carfax will find everything, or that a car with a "clean" history hasn't been worn out by a teen-ager making jackrabbit starts.
Once you find a car that comes up clean, it may well pay to have a mechanic look it over. If you don't already have one, the American Automobile Association (http://www.aaa.com) has diagnostic clinics that will evaluate a vehicle for $80 for members and $95 for nonmembers.
AAA also sells warranties for used vehicles. Top-of-the-line, three-year coverage for my 6-year-old Taurus wagon would run $1,100, for instance. At about $30 a month, this coverage is a pretty good deal.
XJeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at jeff.brown@phillynews.com.