Laura Rowley Money & Happiness

When it comes to transportation, my decisions are driven by the numbers. I save up the cash and buy cars that are at least three years old, letting someone else take the depreciation.

I have three children, so I'm already doomed to drive a "loser cruiser" (as my 12-year-old calls the minivan). Moreover, "wear and tear" takes on a new meaning with kids -- not only direct assaults to the interior trim, but the ancillary damage caused by assaults on my attention (like last week, when I backed into a line of grocery carts in the store parking lot). The used-car mindset has always made sense to me.

But analysts suggest that in recent weeks, a perfect storm of economic and automotive trends has created a phenomenon in which new cars may offer a better deal than used.

"We have never seen this before -- where the prices and the deals on new cars are becoming equal to or cheaper than used," says Jesse Toprak, senior analyst with the auto website Edmunds.com. "Discounts on new cars have never been higher. If you adjust the new-vehicle selling rates with the population growth, this is the lowest level of sales since World War II -- which means dealers are desperate to get you in the showroom."

Incentives from manufacturers, dealers and the federal government -- with its Cash for Clunkers program launched July 24 -- are all driving new car prices lower. Cash for Clunkers offers a $3,500 rebate to buyers who trade in beaters averaging less than 18 miles per gallon for vehicles that get 4 to 9 mpg more. (The new car must achieve at least 22 mpg.) If the trade-in results in an improvement of 10 mpg or more, the buyer receives a rebate of $4,500. 

"The incentives are incredibly high from the manufacturer, and dealers are giving up part of their profits in order to get the cars moving," says Art Spinella, president of CNW Research in Bandon, Oregon. "You add Cash for Clunkers into that mix and -- if you have the right vehicle to trade in -- you're looking at $6,000 to $7,000 in savings on a new car. It puts the cost in the same category as a relatively-new used car."

Chrysler, for example, is matching the Cash for Clunkers offer with a $4,500 rebate, for a total savings of $9,000. "You can buy a $25,000 new minivan and wind up paying $16,000," Spinella says, with the bonus of new-car warrantees and safety features, such as ABS brakes and side airbags.

Consider All the Options

Moreover, quality has improved, says Erich Merkle, president of Autoconomy.com, an automotive analysis and consulting firm in Grand Rapids, Mich. "I don't think there's ever been a time when we've seen such good product available in the marketplace," he says. "We've always known Toyota and Honda can build a quality car, but Ford and GM are closing the gap and coming out with great features and well-designed vehicles. The competition is creating an environment where people have more choice and better product than at anytime in automotive history."

Go beyond advertised incentives and find out if there are direct-to-dealer perks or dealer holdbacks (typically 2 percent to 3 percent of the car's price, granted to the dealer by the automaker once the car is sold). "You may be given a deal for $500 off, but there may be another $1,500 behind the scenes," says Jeff Bartlett, deputy online auto editor for ConsumerReports.org. The company unveils those details in its new-car price reports, updated weekly and available online for $14.

Even if you don't own a qualifying clunker, come to the dealership ready to negotiate your trade-in. Analysts say many dealers are relying on used cars to get through the downturn, boosting the values of five-, six- and seven-year old vehicles. Spinella recommends asking for 20 percent more than the Kelley Blue Book value.

In addition, for purchasers who finance, the year-long freeze on auto loans is thawing. "Lots of people couldn't get a car loan six months ago, even those with really good credit," says Spinella. "GMAC and other lenders have loosened up credit criteria. The interest rates on new car loans are lower than interest rates on a used car, so that monthly payment will end up being pretty close. So the advantage really does tip to the new car side in all of that."

If a car buyer can find 0 percent or 1 percent financing, it saves an average of $4,000 to $5,000 over 60 months, analysts say. "Make sure you shop around for financing and go into the dealership knowing you are pre-qualified for a reasonable loan," advises Bartlett. "They'll be able to tell you right away if the dealer can beat or match that."

In a few cases, automakers are combining cash back and low APRs. Ford, for example, is offering its 2010 Fusion model with 0 percent financing and $1,000 cash back. (And at 23 mpg, it qualifies to the Cash for Clunkers program.) Edmunds.com features a "Deals of the Month" tab that examines the best buys for consumers who pay cash, finance or lease.

Bartlett expects buyers to get the biggest bang for the buck on 2009 models. "Obviously the dealer lot is bloated with 2009s -- those are vehicles you'll get the deals on," he says. "They'll depreciate a full year in a month, because the 2010s are arriving, but if you hold on to the vehicle for a fair number of years that doesn't matter."

On the other hand, don't just buy a car because it's cheap. "Don't be swayed by all the incentives," says Bartlett. "Focus on finding the best car for your needs, one that's safe, reliable and has low owner costs. Then look to the incentives, because there are deals to be had from almost every company." For instance, not a single model made by Chrysler, Dodge or Jeep meets the minimum requirement to be recommended by Consumer Reports, which runs 50 different tests for reliability, safety and performance.

There is one downside to a huge bargain: It may come back to bite consumers who frequently trade up. "The incentives on the vehicles have a direct impact on the resale value, especially if want to trade it in in the next three years," says Toprak. "Be cautious of incentives because you'll pay for it. But if you're going to keep it until the wheels fall off, then it's a good deal."

Outlook for Used Cars and Leasing

At the same time new vehicle prices are falling, used cars prices are on the rise. In the difficult economy, individual owners, large companies with fleet vehicles and rental car firms are hanging on to their autos longer. "It used to be fairly common to rent same-year models from the daily rental car service with 7,000 to 8,000 miles on them -- now they're two to three years old with 40,000 miles on them, and they're really trashed," says Spinella.

Moreover, auto dealers have increasingly lengthened leases to 80 months, so the supply of used cars coming off short-lease contracts has dried up. "Used-car prices are probably bound to go higher because the inventory situation isn't going get better anytime soon," Toprak predicts.

Leasing is also becoming less attractive since automakers such as Chrysler and BMW have exited the finance business. In the past, the automakers could offer better leasing terms because they could "subvent" the residual value of the vehicle, that is, exaggerate the future trade-in value, because they were making money on both the finance charges and the car. "There are smaller numbers of lenders involved who will only profit off the finance charges -- suddenly cars you could lease for $299 are now $399," Bartlett explains.

If you want to buy a new car, don't wait for the Labor Day clearance sales, analysts say. Back in January, dealers had 140 days supply of vehicles; today it's about 62. "Because inventory is starting to come down, it's going to get harder and harder to find the vehicle you want after the third quarter of this year," says Spinella. "For the broadest selection of new cars between now and September, this is probably be the best time to buy -- the sooner the better. Also, incentives are going to start getting tighter over next six months."

Bartlett agrees: "Come Labor Day there might be a bunch of pink cars with stick shifts."

For more on Cash for Clunkers, see my blog.