Because new cars tend to lose value rapidly, the conventional wisdom is that it usually makes more sense to buy a used vehicle instead of a new one. But is this rule of thumb always true? Has it changed in the past few years? That’s what Lily wants to know. She writes:

Time Moneyland recently reported that used vehicle prices have hit a 16-year high. On the radio, car companies are asking people to trade in their used cars because their inventory is low. When I look at used cars, I can’t believe how much they’re selling for. For example, one car dealer is selling a 2010 Honda Civic LX with 44,000 miles for $17,575!

If I were to buy a new Honda Civic (with no miles, without any discounts, and using only the features I care about), its MSRP would be $17,715 (including destination charge) for a 2012 version! (Or $18,925 MSRP for the DX.) I keep hearing that if you want to save money, you should only buy a used car. But is this only true for some makes and models?

I’m looking for a reliable, standard, low-cost model that will last for ten years. I don’t care about adding a lot of features to my car. Is that why some of these used cars cost so much? Because they’re loaded with extra features I don’t care about?

I guess my question is: When looking for reliable transportation in a standard low-cost car, is it better to buy new or used? And if used is better, do you have any advice on getting the prices down and finding a good car that isn’t a lemon?

In general, new cars do lose value quickly. But due to a variety of factors, prices on used cars are indeed high right now. As with many personal finance rules of thumb, the “new cars drop in value the moment you drop them off the lot” guideline isn’t true all the time. Your specific circumstances may differ. In your town, the car you’re looking for might hold its value better (or worse) than average.

Also, a new car isn’t always a bad idea. If you intend to own the car for many years — to drive the thing into the ground — then a new car can often be a good choice. My wife prefers to buy new cars, and I think they’re a fine choice for her. My next Mini may be purchased new, too.

The key to making a smart choice is to take your time and crunch the numbers, just as Lily is doing. If you’re in the market for a vehicle and not sure where to start, do some online research. When I was shopping for a used Mini Cooper a couple of years ago, I spent a lot of time playing with web tools like these:

  • MSN Auto has a list of best and worst depreciating vehicles. (The best? The Mini Cooper, which holds 67% of its value after three years. The worst? The Ford Freestar, which loses 75% of its value!)
  • Consumer Reports has an even more detailed list of the best and worst used cars. If you’re considering a used car, this is a great place to start your research.
  • The Edmunds True Cost to Own calculator lets you see how much it costs to own and operate an average vehicle. You can enter the year, make, and model of the car you’re looking at, and the calculator will break down a number of costs, including depreciation.
  • Kelley Blue Book can help you determine whether the price on the used car you’re eyeing is too high (or if it’s a steal!). The site also now has a perfect car finder tool.

Once you’ve picked some candidate cars, you actually have to make the purchase. It’s here that even the best-laid plans can fall apart. Buying a used car can be filled with all sorts of pitfalls. It helps to do be as prepared as possible. Last December, Consumer Reports posted a step-by-step guide to buying a used car. Once you’ve done your initial research, use this guide to help you score a good deal on a used vehicle. It’ll help you be aware of common car-dealer tricks and better negotiate a fair price.

All of this is theoretical, though. Lily wants to hear actual reader experience. Where do you come down on the new car vs. used car debate? Have you purchased a used car? What was the process like? If you bought one recently, did prices seem high? Do you have any hints or tips to help Lily find a good used car at a fair price?

Extra! Here’s an old article from Edmunds that describes how to drive a (nearly) new car for (almost) free. Though a new car loses value quickly, many models then maintain their value for several years. Buy one of these models — and sell it before the value starts dropping again — and you can minimize the effects of depreciation. (See also Dave Ramsey’s “Drive Free, Retire Rich” presentation.)

This article is about Ask the Readers, Cars