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Related topics: Liz Weston, cheap cars, cars, used cars, savings

We here at MSN Money are big fans of buying used cars. You can save a small fortune over a lifetime, as you learned in "The joys of a $5,000 used car."

With proper maintenance, today's better-built cars can give you years of reliable service, as you read in "Make your car last 250,000 miles."

But a serpent has entered our frugal Garden of Automotive Eden -- in the form of rising used-car prices.

After crashing along with the economy in 2008, used-car values have been marching steadily higher. In August, the average cost of a 3-year-old used car was 20% more than two years earlier, according to car site Edmunds.com:

 
Average price paid for 3-year-old vehicle
Month/yearPriceChange
August 2007$17,187 
August 2008$15,835-7.9%
August 2009$17,43910.1%
August 2010$19,0059.0%

Some models have soared 30% or more in just the past year, Edmunds.com found:

 
Average price of 3-year-old vehicle
Make/modelJuly 2010July 2009Change
Cadillac Escalade$34,715$25,60035.6%
Chevrolet Suburban$27,193$20,26234.2%
Dodge Grand Caravan$15,629$11,66134.0%
BMW X5$40,843$30,71133.0%
Acura MDX$29,852$23,10929.2%

And the worst is yet to come, according to Edmunds senior analyst Jessica Caldwell. Autumn 2011 will mark three years since the credit crunch really hit the car manufacturers, many of whom sharply reduced or eliminated their leasing programs.

"We see (prices) getting really high next fall," Caldwell said. "A big portion of the used market is cars coming off leases, and those won't be there." Not only has the supply of leased vehicles been drastically reduced, but people are hanging on to their cars longer, further constricting supply, Caldwell noted. Before the recession, the average trade-in age for vehicles was between four and five years. Now it's between five and six years, Edmunds figures show.

As Automotive News recently noted: "This snowball effect is just going to get worse as first 24-month cars, then 30-month cars, then 36-month, then 40-month cars don't come back as trade-ins -- because they were never built and bought in the first place."

Liz Weston

Liz Weston

Carmakers also have retooled their production to meet lower demand, which means they're not forced to offer those eye-popping deep incentives to move vehicles off the lots -- incentives that tend to push down prices of used models as well.

All this adds up to higher prices despite lower demand.

Caldwell, for one, doesn't see a turnaround in this situation anytime soon. Goosing the supply of used cars would require more sales and leases of new cars, and that would require a whole lot more consumer confidence than she's seeing now.

"People are still very cautious about spending money," Caldwell said. She doubts they'll overcome their reluctance until the employment picture improves. "That's what you have to get for everything else to fall back into place."

So what's a frugal person to do in the meantime? You could:

  • Wait it out. Economies are cyclical. At some point, ours will improve. If you like the car you've got and take good care of it, you may not have to look for a replacement until the supply of used cars has improved.
  • Replace your car now. If you were planning to get another car in the next year or so, doing so sooner rather than later may save you money -- particularly if the car you're after is a large SUV, a luxury car or a minivan, which have seen greater-than-normal upticks in price recently.
  • Consider orphaned models. If you want maximum resale value, you typically avoid models that have been discontinued such PT Cruisers, because their prices tend to plummet. But if you're looking to drive a car until the wheels fall off, as we "frugalistas" like to do, then you're more likely to find bargains among the castoffs. (Anything from Mercury, Pontiac and Saturn -- recent casualties -- might be a good bet. Start your search at AutoTrader.com.)

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  • Consider new. It's a shocking notion for us cheapskates, but there are several models of new cars with incentives that make them as cheap or even cheaper than their 1-year-old versions. Now, this assumes you finance the deal, and a 1-year-old car won't be as cheap as an older version. But you may find yourself with less of a gap between the after-incentive new-car price and the older-car price than you typically do.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.