The Ultimate Guide to Car Depreciation

Did you know that a car depreciates by an average of 10 to 11 percent the moment the driver leaves … Continued

Did you know that a car depreciates by an average of 10 to 11 percent the moment the driver leaves the dealership? New cars lose about 14 percent of the value within the first three years of ownership and up to 60 percent in five years. Thankfully, there are things that you can do to reduce your vehicle’s depreciation before and after buying it.

car sale

What is Car Depreciation?

If you are considering buying a new ride, you ought to shift your focus from how well the engine runs to its deprecation potential. Depreciation is the variation between a vehicle’s value when you buy and the amount you would receive if you chose to sell it. A car’s value drops every year, and the depreciation rates usually fluctuate. Therefore, you might realize that the pricey ride you bought a few years ago is worth almost nothing compared to the money you paid for it.

Why Do Vehicles Depreciate So Quickly?

You will find the facts to this query below; alongside other burning questions you may be having regarding the matter.  So, if you want to grasp facts to help you make proper investment decisions, read on.

How Does Car Depreciation Happen?

Depreciation is a result of wear and tear. Think of it this way; how much would you be willing to spend on a 7-year sofa set that would require being re-upholstered? Probably not much and you would not even be ready to purchase it. If you choose to buy the piece, you will want to spend less than the buying price of a new one, because the rate has fallen and its value is worth less than the original price.

Cars also appreciate because of a fall in demand. If there is a limited market for your vehicle, there is no way it’s going to be worth the amount you paid for it originally.

How Soon Does Your Car Start Depreciating?

Here are some shocking statistics. Your car will appreciate the most during the first year. The loss is excessive when you first drive your car. You are probably wondering how it can be so, yet a vehicle should only lose it value if it is not operating optimally. The answer depends on the price of your vehicle. Here are the three prices you should be aware of:

  • Wholesale price: The amount the dealer will pay for the automobile when they purchase it from the manufacturer. It is also known as the factory price.
  • Manufacturer suggested retail price: This is the price the vehicle manufacturer things the car should retail at.
  • Retail price: This is the amount you pay when buying a car from the dealership.

Since car dealers want to make money (which is why they are in business in the first place), they place a significant markup on the car. Most ask for 5 to 10 percent of the vehicle’s original value. This means that the instance you drive the car out of the dealer’s store, the value of the car will have depreciated by the difference between the buying price and the wholesale price. When you factor in the fees and taxes that you paid when buying the ride, you will realize that it has depreciated by about 10 percent the first minute you own it!

That is why many people opt for a used vehicle that is in proper working conditions to evade the heavy burden of depreciation that one experiences when buying a new car.

How Much Does a Car Depreciate Every Year?

As mentioned previously, by the first minute of ownership, the vehicle will have lost about 10 percent of its original value. However, note that this depreciation might be excessive depending on the model of the car you buy. After the first year, the car’s value will again drop by 15 to 25 percent. Five years down the line your car will be worth 37 percent less than its retail price. This means that even when you purchase a used car, you will avoid the initial loss but will still have to deal with the following depreciation rates. Remember to consider the depreciation rate when buying a vehicle, whether new or used, so that you can save on cash.

Do Some Cars Depreciate More Than Others?

Yes, all cars lose value at different rates.

Here are those that depreciate the fastest:

  • Luxury vehicles

They include Jaguar, Mercedes, Maserati, and Cadillac. Luxury automobiles tend to have a high markup, which means that you can be paying $90,000 retail for a ride whose wholesale price is $70,000. This results in a steep depreciation the moment you purchase the vehicle.

  • Cars that have low demand

If you go for a vehicle that nobody else wants to buy, there is little monetary value in it. Such cars are hard to sell, and when you find a buyer, they have the upper hand in setting the price.

Here are the cars that depreciate the least:

When choosing a car to buy, consider those that depreciate at a low rate because they are the best choices to invest in. The BOVY is an award given to vehicles that have low costs of ownership and operation within the first five years and those that retain an exceptional overall low depreciation value. Based on the choice of this award, the cars that lose the least in amount include passenger cars, sporty cars, and compact cars.

Kelley Blue Book gives a similar award, and according to the winners, the best cars with regards to depreciation include compact SUVs, Toyota models, and Saw trucks.

car value

12 Factors That Affect Your Car’s Resale Value

When purchasing a new ride, you should take a moment and determine whether you want to sell the vehicle soon or within a large span of time. Why so? If you’re going to resell it after a short while, you should opt for an automobile that depreciates at a low rate within the years. Consider the factors responsible for car depreciation and device tactics that will ensure the car lasts for a long time. Although many people are of the idea that the most substantial factor affecting a car’s resale value is its working condition, it is not the case. Here are factors that influence your car’s resale value.

  • Brand

Given an option, most car buyers would go for brands such as Honda and Toyota because of the reputation of impressive quality. Some brands are thus associated with excellent functionality and longevity. The brands and models are known to be efficient and low on maintenance, even when the car is a few years old. Most people are aware of this and tend to prefer these brands when buying a used car.

Therefore, if you wish to favor the selling price of your car two years from now, make sure you go for the reputable brands, even if they have a bigger price tag. To understand the brands considered timeless by prospective buyers, all you need to do is a little research, and you’ll be good to go. The brand name plays a primary role in determining the automobile’s resale value. Some names might get you as much as 60 percent of the initial cost after as long as three years. Can it get more favorable than this?

  • Mechanical performance

How well the car is doing will determine to a large extent, the price it retails for. A vehicle must be well maintained to keep the resale value high. This is because second-hand car buyers are not looking to deal with pre-existing conditions like smoky exhaust and oil leaks. Keeping your vehicle maintenance documents and reports might also have a positive impact on its resale price.

  • Color of paint

However surprising this might seem, the fact is that you want to go for a vehicle that’s painted your favorite color rather than other colors you don’t fancy. Although it’s okay to go for bold and vibrant colors if you do not intend to sell the vehicle, consider sticking to the basics. After all, you might find yourself in the market trying to find a buyer for your car. Colors such as gold, silver, black, white, red and other classic colors never stop being favorites. Therefore, such colors are a safe bet. There is one exception to this, which is if the editions are limited to a particular model and are highly sought after within the coming years.

  • Vehicle appearance

When walking down a street or into a mall, you will realize that people are drawn towards nice looking displays of stores or products. The same is true for cars because some are more appealing to buyers than others. This may be due to their appearance or proper maintenance, which is visible from the outside. However, if the car appears to be scratched, rough, dinged up and worn out, nobody will want to buy it at a high price. Bad smell inside the vehicle as well as cracks or chips in the windows and non-functioning features are other aspects that might have a negative impact on your vehicle’s selling price.

  • Mileage

If your car is in excellent working condition and appearance, is there any other reason that might stop it from fetching a high resale value? Unfortunately, there is, and it’s mileage. Mileage is an important aspect with regards to determining your car’s resale price. The buyer will want to know the number of miles that the vehicle has traveled since you first bought it. Usually, a higher mileage means a lower price, because it is assumed that the car has been used relatively more than one with lower mileage. If you plan on selling the automobile in the future, you should consider cutting down on the number of miles you travel in your car. Remember that the fewer the miles a vehicle run, the higher the resale value it might fetch.

  • Used car demand

Supply and demand are critical factors in any market, and the car space is not an exception. Special edition and limited vehicles are usually produced in limited quantities. Therefore, they are likely to fetch more money in the second-hand market. Some manual transmission sports cars are also rare to find and usually cost more when they sold as used vehicles. Also, some vehicles are considered to be liked by the public, which means that their demand is higher.

  • Features and add-ons

When it comes to used cars, additional features that increase the car’s price can be a disadvantage. Most buyers are usually on a strict budget and are not willing to pay extra money for added features that they do not deem necessary. However, things like GPS are advantageous, because every buyer would not mind having a feature to guide them through a city they know very little about. The same applies to power steering, music player, air conditioning and central locking. Make sure you take time before making decisions to include features that enhance the look of the automobile. Analyze the add-on based on whether it is a good investment or not, before deciding to install it.

  • Cars and climate

Your location and the weather in your area will have a significant impact on your car’s value. In case you dwell in a climate that experiences the effects of ice and snow, efficient vehicles are in a better position of retaining their benefits more than convertibles and sports cars. If you are used to parking the car indoors, it is generally protected from weather elements and is therefore likely to offer better resale value than those that are parked outdoors.

  • Drive terrain

The car’s resale value will also depend on the season as well as the location you plan on selling it. For instance, people residing in places with cold climate prefer to drive four-wheel cars while others in various regions opt for SUVs. The best thing is to research into what people in the area like and what they dislike, then invest in a car with this in mind.

  • Car rust

This is another seller’s or buyer’s nightmare, and it is a factor that might diminish your car’s resale price. There isn’t much you can do after a certain point when the rust is too much, but you can do some things to ensure that you treat the car against rusting. This is particularly vital if you reside in a snowy or salty region.

  • Vehicle rebates and incentives

Sometimes the car manufacturer will offer rebates and incentives to market a new model in the market. The issue with this tactic is that the vehicle is likely to sell for a lower amount in the future. If the dealership discounts a car model when it is new, it will be worth lower in the used-car market as well.

  • Cost of ownership

It takes quite a lot to ensure that a vehicle remains in proper working condition, such as the service, insurance, repairs, and fuel. If you spend a lot on maintenance, buy expensive car parts and pay costly premiums, your car will depreciate more than those that require less money to maintain.

car showroom

Tips to Reduce Car Depreciation

  • Research resale values

Now that depreciation is a big deal to you; it’s essential to know the historical resale values of the cars you are thinking of buying. Just like when one invests in stocks, it pays to look at the past performance.

  • Consider buying nearly-new

If you are really into avoiding depreciation, look for cars that have already been through the first hurdle of dropping in value. Keep and drive it for the coming three years, and then dispose of it by the sixth year. That way, it is relatively new, and you will get prospective buyers.

  • Drive it as if you own it

Taking care of your automobile pays off well in the long term. So, make sure the interior and exterior of the car are in excellent conditions. Work on any scratches, dents or dings straight away and keep it in a garage whenever you can. Stick to the recommended service plan and have detailed records in case you plan to sell it later.

  • Keep off old designs and huge discounts

Another way to keep off substantial depreciation is avoiding cars with old designs. Although this is not the only rule of getting great resale offers, a vehicle with an older model will not fetch much money in the second-hand car market. Also, cars with huge discounts and incentives from the manufactures will lose a lot of value. If a vehicle is on a considerable discount sale, it’s probably because sales are not doing well and too many units have been produced.

It is clear that depreciation is inevitable, but it does not have to be damaging. You need to make wise decisions when choosing a car to buy. Remember to always have depreciation in mind before purchasing a vehicle. Also, make sure you maintain it well to reduce the depreciation rate.

Sources:

  1. Car depreciation is a budget killer. Here’s how to avoid it – CNBC
  2. Car Depreciation Calculator – OMNI Calculator