As part of my continuing series on whittling down the cost of car ownership, we're going to take a look at depreciation costs.
At first glance, depreciation looks kind of mundane; it's simply the difference between what you paid for the car and its current value.
Compared to the other costs of car ownership, such as interest on an auto loan or gas costs, it's kind of sneaky. It lurks in the background, slowly draining away your wealth, and only reveals itself when it's time to sell or trade in your car.
It's also by far the biggest cost of car ownership. The AAA study that touched off this series plugs the annual cost of depreciation for the average sedan at $3,728, or 42 percent of their $8,776 total annual average cost. In comparison, gas
That may seem like a ridiculously high number, but think about it. The rule of thumb is the average car loses around 65 percent of its value after four years. Being that Americans, on average, pay around $29,000 for the average car, according to TrueCar.com, that's a loss of $18,850 over four years, or $4,712 per year. After that, depreciation peters out a little bit, which probably accounts for AAA's lower number.
So how do we defeat depreciation? Well, as the old sports cliche goes, you can't stop depreciation, you can only hope to contain it. Here are a few tips to control depreciation costs.
- Buy used instead of new. Unless a new car is heavily discounted or used-car prices are sky high, used cars will almost certainly depreciate much more slowly than new cars. For instance, Consumer Reports projects a base 2011 Honda Accord to depreciate $3,416 a year for the first three years of ownership, but only $2,000 a year over years four and five.
- Take good care of your car. Obviously, a car in good shape is more valuable than one that's been trashed. Performing required maintenance, avoiding damage to the interior and repairing dings and dents as they occur can save you thousands of dollars of depreciation. For example, on Kelley Blue Book's website, the private-party value of a base 2008 Ford Fusion in excellent condition is $15,315, but an identical model in fair condition is only worth $12,965, a difference of $2,350 or 15 percent.
- Buy a new car that will be in demand with used-car buyers. Buying a rare, highly customized or luxuriously optioned car might be fun, but a middle-of-the-road model in a popular color will probably lose a smaller portion of its value over time, because the market for it will be broader. More potential buyers mean a faster sale and a lower likelihood of having to cut your selling price to move your car.
- Buy a strong brand with a reputation for reliability and resale value. A car from a brand with a reputation for reliability may be only marginally less likely to have big repair costs down the road, but it will almost surely recover a larger portion of its value when it's time to sell.
- Don't buy a luxury car. While some luxury car brands have better resale value than others, buying a luxury car of any type virtually guarantees you'll lose more money in absolute terms than if you had bought a less expensive car to start with. Lexus may have excellent resale value, but Consumer Reports still gives the flagship LS series a three-year depreciation cost of $32,750.
- Sell your car in a private sale. In the real world, your car is only worth what someone else will pay for it, and private parties are almost certainly willing to pay a better price for your used car than a dealer. The higher your price, the less depreciation costs you had to bear, and in most cases, that's well worth spending a little time to sell your car.
- Drive your car until the wheels fall off. Since depreciation costs taper off over the life of a vehicle, the longer you hold on to the same car, the less you'll be hit by vehicle depreciation.
What do you think? Are there any ways to fight depreciation that I forgot to mention?