Understanding car depreciation
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Depreciation is a fact of life when it comes to cars. Over time, every car will lose some of its value. This is called depreciation, and it’s the reason why used cars are usually cheaper than new cars. Depreciation happens quickly, too. In fact, in the single minute after you drive your new car off the lot, you could lose a significant chunk of the car’s value, and the first year alone, your car could be worth 20 percent less than what you paid for it.
There are a few factors that affect how much a car will depreciate. Things like mileage, age, condition, and perceived value all play a role. But there are some things you can do to help minimize depreciation. Taking good care of your car and driving carefully can help extend its life and keep its value high. If you’re considering buying a car, it’s important to understand depreciation and how it can affect your purchase. Keep reading to learn more about car depreciation and how to make the best decision for your needs.
How much do cars depreciate?
The amount of depreciation for cars depends heavily on the make, model and year of the vehicle, along with how many miles are on it.
In general, new cars depreciate in the blink of an eye, and a new car can lose up to 20 percent of its value in the first year. Plus, a new car’s value over the first five years will typically fall to about 40 percent from the original price. That means it loses about 15 percent of the value each year after the first year.
And, a brand-new car loses somewhere between 9 to 11 percent of its value the moment you drive off the lot. So, with a $30,000 new vehicle, you’re basically throwing $3,000 out the car window as you drive the car home for the first time.
But when you consider a few other factors, such as the year and make of the car, and depreciation can change dramatically.
Used cars do not depreciate as quickly as new ones, but they do lose value as time passes. From the second to fifth year, a car loses approximately 10 percent of its value each year, according to Carfax.
New car depreciation
Unfortunately, new cars depreciate more quickly than older ones, which is something to consider when you are deciding whether to buy new or used. A new car does have advantages. For example, most new cars come with a significant manufacturer’s warranty and you can be sure that you’re not purchasing a car that has been abused by a past owner.
If you like having a new car, one way to get around the problems raised by depreciation is to lease your vehicle. The price you pay for that lease takes depreciation into account, and when the car has gotten to an age where it might be showing the effects of depreciation, you can either return it to the dealer or purchase it at a reduced price.
Used car depreciation
Used cars do not depreciate as quickly as new ones, but they do lose value as time passes. That means buying a gently-used two year old model, for example, may make sense if you are trying to save money. You are still getting a car that is close to being new, but at a price that could be 30-40 percent less than what a new model would cost.
Of course, at the same time you are buying a car with two year’s worth of wear and tear on it. It is a good idea to take the car to a trusted mechanic to be sure it is in good shape, especially if it is a private sale.
How can you find out the true value of a used car? Online sources such as Carfax’s history-based value tool, as well as websites like the Kelley Blue Book and Edmunds, can give you a good idea of what any used vehicle should cost.
What causes car depreciation?
Depreciation is caused, in general, by the wear and tear that any vehicle experiences as it is driven. Driving down highways and city streets day after day takes a toll on the car’s various parts, from tires to transmission, and after a while, that toll makes your car less likely to function properly. But there is more to it than that. Here are things to take into account when considering a car’s depreciation:
- Mileage: Your car’s parts are designed to last only a certain amount of time. Tires, for example, are usually good for 50,000-60,000 miles, then they need to be replaced.
- Age: Older cars especially use parts or systems that are no longer manufactured, or which cost more to obtain.
- Perceived value: Most people would rather drive a shiny new SUV than a beater, even if the beater runs just as well as the SUV. This perceived value causes older cars to be less desirable on the market.
- Efficiency: Newer cars use systems that are more efficient — for example, they may run longer with less fuel than an older car. Efficiency is especially important when looking at electric and hybrid cars, which are slowly becoming more popular.
- Condition: If your car has been in an accident, or received scratches and other damage along the way, it will be worth less than a car that is in mint condition.
How to mitigate depreciation
Fortunately, you do not have to be entirely at the mercy of depreciation. There are some fairly simple actions you can take that will help minimize depreciation and thus, when the time comes to sell your car, enable your projected car value to remain high.
Maintain your car properly
Taking good care of your car helps minimize wear and tear and allows your car’s parts and systems to last as long as possible. Get regular oil changes and be scrupulous in following the manual’s recommended servicing intervals. Keep all records of maintenance in a file that you can present when you sell, to show that you have been a careful owner.
Keeping your mileage down will help your car last longer. When you do drive, avoid bad practices such as jack rabbit starts or excessive speeding. Practices such as these put additional strain on the car’s engine and brakes, leading to premature breakdowns and accelerated depreciation.
Consider quality used cars
A late-model used car in excellent condition can save you money from the start, and last nearly as long as a new car. You may also save money on insurance with a used car. Look at ratings for the car you are interested in to see if it holds its value over the years. Some makes and models may generally need less repair work than others, for example. A cheap car whose transmission goes bad in the first year will not, in the end, prove a good financial alternative.
Frequently asked questions
No official designation exists for the “best” car insurance company, and each driver will have different needs and wants that will help to determine the best car insurance company for them. When trying to find the best car insurance company for you, it may be helpful to narrow down the options to the companies that meet your needs or wants, whether that’s the lowest price, the most coverage options or another factor entirely. In addition, every carrier has different pricing factors and discounts that contribute to different coverage costs, which means you’ll want to shop around and compare before choosing an insurer.
Unless you are set on owning a brand-new car, it can be financially advantageous to purchase a late model, well-cared-for car from a brand that is known for producing reliable and sturdy cars. That’s because cars lose value every year that they are driven, but the drop in value can be more significant during the first couple of years of a car’s life. As such, you can avoid the significant depreciation hit you would get with a new car by buying a reliable used car that is already a few years old.
No. Depreciation depends on a number of factors, including the quality of the components that went into building the car, as well as your own care in maintaining the car. The popularity of the car or that type of car also plays a role. When gas prices are high, for example, gas-guzzling SUVs depreciate quicker because they are less popular on the market.