I have been researching trading in my current vehicle and purchasing a new or use model. From what I can tell used vehicles across all manufacturers are still up substantially, ~25% YoY on average. Though, I can't seem to get a good understanding of how much new car values are up given they don't have any sales history to track.

I would prefer a more general answer, but in my specific case, I have a vehicle that currently is valued at ~$50k USD trade-in. I would like to buy a new 2022 model that is listed at ~$50k MSRP. I have ~$6k USD positive equity in my trade in. I would like to reason that because I am receiving more on my trade in (since used car values are up), that that value offsets how much more I am paying for the new model (since inventory is low, and newer models tend to cost more YoY). Is that correct reasoning?

My other related thought, if a car dealership 3-4 years ago before the current chip shortage had 100 vehicles on the lot and only had to make $1k profit on each to run the business. But now has 10 cars on the lot, they must make $10k profit on each to run the business. Does/Can that difference necessarily match the increased value of my trade in?

  • Is there any reason not to do the standard "ask 3+ dealers to send you their best price on a specific model/trim/color, and take the lowest"? Then you would have specific numbers for your target model, which we can't give you.
    – stannius
    Nov 4 at 18:08
  • What was the mswp for your current car and how much did you pay for it? Where do the 6k trade in profit come from? Do you get 56k for a used car worth 50k, do you get the new car for 44k instead of 50k, or did you buy your current car for 44k, but it is now worth 50k? Or do you assume that your car should be worth only 44k, but you actually get 50k for it?
    – Solarflare
    Nov 5 at 14:37

In general, new cars depreciate much faster than used cars. Historically that's been about 40% after the first two years, but can vary based on the model. Used cars, on the other hand, tend to only depreciate 5-10% per year after the first 2.

So if you have a used car that's worth $50k now, it will lose less value over the next 5 years that a new car that's worth $50k today. So assuming the same loan payment, you'll have more equity by keeping your current car than getting a new one. If you decide to extend your loan on the new car, you'd just be compounding the problem.

The only way it makes financial sense to buy a new car is if you pay for it with cash (since you'll either quickly be underwater or have much less equity than a used car) and can insure it without a large strain on your finances. Otherwise, used cars are almost always the better move financially.

Certainly the current supply/demand climate may change the math a little (perhaps you're trading in in a car with high demand like an SUV for one with lower demand, and less markup), but I'd be very surprised to find a situation where trading a used car for a new one is a good financial move.

  • 3
    This is coorrect in the long term, but isn't taking into account the current bubble in car prices (both new and used) caused by pandemic-related shortages, which is what the OP is asking about.
    – jamesqf
    Nov 4 at 17:00

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