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Lady trying to understand car depreciation in new cars

The Ultimate Guide on Understanding Car Depreciation in New Cars

Anyone who has ever shopped for a new ride questions whether they could buy a new car or a used car. However, one thing that really hits home for many car buyers is the fact that a new car depreciates so much faster. Faster, as in immediately when you drive it off the lot!

For those unfamiliar with what depreciation is exactly, this article will explain how this applies to the car buying process and why it makes the opportunity to buy a used car so desirable. The value of a new car can fall at a rate that is beyond alarming. While this certainly varies among models and manufacturers, in general, cars lose their value quite quickly.

If you are thinking of purchasing a new car, there are some facts you need to know before start shopping. According to research done by the Department of Motor Vehicles, depreciation will cost the average motorist three times as much as they spend at the gas pump. This fact can be quite frightening considering how much money one spends at the pump each week! Depreciation is the difference between the value of a car when you make the purchase and when it is time to sell it.

Typically, the drop in value is between 15 percent to 35 percent within in the very first year and up to 50 percent over three years. A whopping 50 percent in just three years can seem simply astronomical when you think about how much money you put into a new car. And, if you financed that car, after three years, you may still be paying on your car. Meaning, you now owe more than your car is actually worth! This is known as “upside down” and is not a good way to sell your car if, after three years you were planning on it.

To put it simply, most assets that you buy lose value over time from wear and tear, and that loss of value over time is the definition of depreciation. This is especially true of cars. According to CARFAX, when you purchase a brand new car for $20,000, the moment you drive it off the lot it depreciates 10% on average, which means now it’s only with $18,000 before you even drove 1 mile! Yikes! That also means your car is now worth less than what you still owe on your car loan, assuming you financed it.

Your car then continues to depreciate more over the course of the first year of ownership, usually by another 10%, which means after 12 months the car is worth only $16,000, and you still have negative equity since you’ve only made a dozen payments on your loan. And then the car continues to depreciate by anywhere from 15-25% a year for another four years, which means it’s pretty common for a new car to be worth less than 40% of what you paid for it new after owning it for five years.

These figures can be downright scary which is why buying a nearly new (or slightly used) car can make a lot of sense. You let the person who bought the car brand new take the biggest hit of depreciation in the first few years, giving you a nearly new car at a much lower price, and you get to enjoy a number of other benefits, such as the car being in good condition, still retaining some of the original warranty, better financing rates, and so on.

Even if you purchase the car when it is three years old, it will still have many of the latest technologies and safety features that new cars have. You will reap all the benefits of owning that car without paying the price of a new car or its depreciation. Of course, that doesn’t mean that used cars don’t depreciate too.

And, it is still important to realize, however, that not all cars depreciate at the same rate as the averages mention above. Less popular vehicles with fewer options will depreciate much faster than cars loaded with options (especially added safety features) with strong brand-name appeal. It’s also true that what’s considered a “hot” used car can change from year to year, so there’s always a bit of a gamble involved. One thing you can always count on, though, is big depreciation on high-end cars – Porsche, BMW, Jaguar, Ferrari, Lamborghini, and so on.

You are much better off purchasing these types of vehicles used, although they are not as often on the used car dealership lots. It makes sense to go for a new car that will hold its value. If you do this, you’re more likely to get a decent sticker price when it comes time to sell your or trade in your car. Some of the best car brands for holding their value according to the Department of Motor Vehicles are Land Rover, Tesla, Maserati, Audi, Mini Cooper, Jeep, Lexus, Dacia, Mitsubishi, and Mazda.

Yet so much affects a car’s depreciation. Things such as mileage can affect the car’s value. The more miles you have, the less your car is worth. Whether or not your car is reliable also affects the depreciation of your car. Some cars have a bad reputation for being unreliable based on customer satisfaction surveys.

Another thing that quickly depreciates a vehicle is the number of owners. Of course, the fewer the better. After all, if you were purchasing a used car, wouldn’t you feel better knowing that it only had one or two owners? If you are purchasing a used car check the number of previous owners on the car’s logbook, V5C registration or with a used car history report.

Of course, the general condition of a vehicle can also cause depreciation. Damage due to bodywork, interior or exterior repairs, etc. will reduce the value of the car. Before buying a used car be sure to get it inspected carefully by a trusted mechanic so you don’t end up with a used vehicle that has hidden problems.

Often, taking a used car to a good mechanic will help you discover problems that you may not have been able to uncover in the test drive or in talking to the dealer. Before purchasing a used car consider the length of the warranty. Three years is good, however, some manufacturers now offer as long as seven years which can be a bonus if you are buying a used car or selling a used car. This greatly affects the value of the car.

Another issue that affects the value of your car is its desirability. Some models are “face lifted” or replaced every few years which makes older versions of the car stand out like a sore thumb. Other vehicle makes go on for 10 years or more looking the same or similar. The more recent the model vehicle you own (or are looking to purchase) the better it will hold on to its value. Size also plays a part in the desirability of a vehicle’s value.

Cars that are extremely large like big luxury models tend to depreciate much faster because they simply cost more to run and do not typically have good fuel economy. Similarly, newer used cars with better fuel economy that get more miles per gallon are always better for buys. This is one of the reasons why diesel cars seem to hold their value better than cars that take regular gasoline. Yet, more and more often with the advent and popularity of hybrid vehicles, this is becoming true for even cars that require regular gasoline.

One thing you can do when checking out used cars for sale is to keep the color in mind. Bright crazy colors are harder to sell, so stick with more neutral colors and the car will end up being worth more than one that’s neon orange. In our experience with cars here in California, white is a very popular color, which means white cars depreciate less than other colors.

Once you’ve found the used car that works for you, there are some things you can do to minimize its further depreciation as much as possible. Perform all regularly scheduled maintenance and keep all your service records – buyers like to be able to see that a car was well-maintained. Something else that’s important is to keep your vehicle clean. Any car with an interior that’s not in great shape is going to be worth a lot less than one that has been kept clean and in good condition.

Depreciation can feel like a depressing topic when you want to buy a brand new car, but it’s like music to the ears of people looking to buy nearly new used cars.

About Author
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Collin Whittaker

My name is Collin and I am the editor and founder of My Used Car Blog. A little bit about my background – I’ve been an automotive technician for 10 plus years and I have worked for companies like Honda, Nissan, and other major automotive repair shops. I am a husband and a dad to three beautiful kids. My reason for starting this blog/website stems from my love and passion for the automotive industry. I will provide expert and insightful information from my years of experience.

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