Depreciation is defined as the decline in a car’s value over the course of its useful life. It is an unfortunate fact that a new car will lose 15% to 20% of its value every year and that means a two-year old car will only be worth about 80% of its 1-year-old value. The 3-year-old car will be only worth 80% of its 2-year-old value. Numbers like that can turn what might have seemed like a good deal at first, into a bad investment after a few years of ownership.
Depreciation affects all cars, not just the new ones and all car buyers should be aware of it if they truly want to make the best purchase possible. Used-car shoppers need to understand depreciation, but it is the new cars that lose the most value as soon as they are driven off the dealer’s lot. At that moment the new car is only worth its wholesale price, that is amount a dealer would be willing to pay for the new car if it was returned for any reason. Any cash spent on taxes and licensing fees is also lost as well. Basically it is the difference between the wholesale price and the retail price that is lost immediately.
Brand, model and the condition of a car also determine a used car’s value, but some brands will depreciate slower than others and hold their value from year to year a bit more. Obviously you’ll pay more for a low-mileage, 1-year-old car that looks like new than you would for the same model with high-mileage and dents, but because no two used cars are exactly alike, anyone planning to sell a car after a couple of years would do best by choosing a model that retains its value well. You may have to pay a little more upfront, but you will also get a bit more back when you sell it. Buyers who plan to keep a car for several years should look for durability and avoid vehicles that have a reputation for needing a lot of repairs.
What might have been a great buy as a new car might be a disaster in the used-car market because it lost over 50% of its value. Vehicles purchased new at a bargain prices can depreciate rapidly and at the three-year mark, the same vehicle might have lost over 50% of its value. By the fifth year of ownership the vehicle might have lost as much as 75% of its value and the added costs of ownership including financing, insurance, repairs, fuel, maintenance and taxes can actually exceed the vehicle’s total value. This means depreciation can actually be the greatest expense during the first five years of vehicle ownership, a stark fact that many consumers simply overlook when shopping for a new car.
This means the resale value of a new automobile purchase is important to every car buyer unless they plan to drive it forever and never sell it. No one really plans to drive one car forever, so the point is moot and resale values still dictate the used values down the road. Buying the lowest priced car possible can be a bad idea as purchasers can often end up losing more cash than they saved on the initial price because the bargain car is worth very little after three to five years.
Consumer perception of value can have a dampening effect on value as tried and true brands will hold more value longer. If consumers don’t believe that one car is as good as another, it will definitely affect the resale value. In a climate of rising gasoline prices, vehicles that do not meet consumer expectations for reliability, dependability and fuel economy can also suffer in resale value as evidenced by the recent dip in values across the entire full-size SUV segment. Customized vehicles will have lower resale values than unmolested examples of the same car as not all buyers are willing to pay for the modifications.
It is possible to increase a vehicle’s resale value by equipping a vehicle with options that may attract buyers later, like anti-lock brakes, navigation systems, cruise control and other options, but there is no guarantee that ploy will work in every case. Used car dealers have shown a preference for vehicles that are painted in standard colors like black, white or silver and are standard in appearance without too much customization because they are easier to sell. In the end it boils down to gaining knowledge of the market through diligent research and a bit of shopping around for a deal that works up front as well as several years down the road.
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