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Save $600 on a Used Car with this One Trick

By Hal M. Bundrick

NEW YORK (MainStreet) Used car prices are falling at their fastest rate in two years registering an average decrease of 3.5% in October alone -- and the National Auto Dealers Association expects prices to fall an additional 2% in the next couple of months.

But to get an even better deal, there is one piece of information that can save you a bundle: look for new vehicles offering rebates and then shop for the same model used.

The NADA Used Vehicle Price Report says a new vehicle cash incentive of $1,000 reduces the price of the same one-year-old used vehicle by nearly $600. Special lease and finance rates also lower the price of a one-year-old model, but to a much lesser degree.

When market conditions are equal, such as time of year, level of supply, etc. and manufacturer suggested retail prices remain constant, an incentive of $1,000 on a model with no previous discounts would result in the price of a one-year-old version of the same model to fall by $563, NADA reports. For a three-year-old version and a nine-year-old version of the same model, the price would drop by $381 and $133, respectively.

"This pass-through effect means cash incentives continue to exert a sizable negative influence on prices far removed from more recent model years," said Jonathan Banks, executive automotive analyst at the NADA Used Car Guide.

The auto industry has drastically reduced incentives from pre-recession levels, but that trend is reversing as competition stiffens. The average incentive on new vehicles is $2,574 per unit, up 3% from a year ago, though down 12% from 2004's peak and 2% below 2007's pre-recession average of $2,631.

"Looking ahead, NADA expects that slower new sales growth and fiercer competition will see incentives rise modestly in the coming years," said Banks. "But we don't foresee an imminent return to destructive levels of the past. Plus, the industry as a whole is building what is arguably the best product ever, which minimizes the need for a dramatic shift in incentive spending."

NADA expects manufacturers will likely continue to focus their discount strategies on finance and lease promotions rather than customer or dealer cash.

"While we expect to see incentive spending increase moderately in 2014, a prudent discount mix and a commensurate rise in MSRPs will keep new vehicle transaction prices from falling, and this, in turn, will mitigate downward pressure on used vehicle prices," Banks said.

--Written by Hal M. Bundrick