I asked myself this question sometime in the last few weeks as I am considering getting a new, used car. It’s an emotionally charged issue because the dialogue touches on value. The conversation is not just about how you spend money or how much money you spend on a vehicle that is new to you, but also about why you choose to spend it. Some see buying a new car as fiscally unintelligent and have vehicle depreciation at the forefront of their mind; others go out of their way to buy new.
The best way to address the question is to say a tentative “Yes, there are ways to be smart about depreciation.” However, depreciation exists to knock off dollars from a vehicle’s worth over either a short or long time, so no it cannot be entirely outsmarted or avoided. Really, it’s beyond the scope of one article, but I will summarize the findings of my short time of research.
First of all, I will not assume that you even know what vehicle depreciation is. Essentially, it is a fact of the car industry that used vehicles sell for less than new ones. As soon as you buy a new vehicle and take it off the lot, it has now become a “used” car and will be worth less. That is depreciation. This specific, “off-the-lot” depreciation runs anywhere from 10-30% off the price you just paid for it. (I know, a ridiculously big range. Stick with 10-20% and you’ll cover most of the figures I found online). Add to that, the additional loss of value with each passing year of a car’s life. The curve of a depreciation line is much steeper in the first several years, a small but critical fact to remember in the topic at hand. Depreciation is a complicated mix of the economy at the time of resale, the condition and accident history of the car, mileage, and current market demand for it. It has a lot to do with perceived value of ‘new’ over ‘used’; ultimately, dealers need to make the purchase of a ‘new’ car compelling. Generally, a vehicle with high reliability will have a much lower depreciation rate because car owners seek out a vehicle that is dependable and not a sinkhole for repair costs. This popularity buffers a vehicle from rapid depreciation.
You have three choices to combat vehicle depreciation:
- buy used and let someone else pay that depreciation;
- buy new with the intent of holding onto the vehicle for at least 10 years;
- lease a new car so that you will not have to deal with a loss in value of the car you are driving. You’ll simply finish your lease and walk away.
When a new car is acquired, depreciation is an expense that the new owner must cover. He just has to absorb it; he will never get it back. If you were to purchase a used car that is 3 or 4 years old, the previous owner has already paid over half of that vehicle’s depreciation for you, since the depreciation rate is much higher in those years. Even better, buy a car that is 7 or 8 years old and avoid having to absorb depreciation almost entirely. Be sure to find out the consumer complaints that the model you are looking for has, so that you can have a sense of likely repairs that may be around the corner.
If you plan to buy a brand new car, know the depreciation rate of it. To not do so, is to have no real idea of the cost you are about to absorb. (I’m guessing that if you’re reading this article, you aren’t one of the lucky few who can purchase a car without worrying about the price tag). There are several great depreciation calculators online for you to use. Though they are unable to consider all of the factors of depreciation, they are a good place to start. Based on average rates, they can help you have a sense of what you’re heading for. Also, know that you can haggle over the sticker price with the car dealer; it’s just a suggested price. Why not pay less from the start? Plan to hold onto your car for as long as you can. After about ten years, the depreciation rate is negligible. Do some research- buy a car with a reliable reputation, maintain it well inside and out, and you will be doing much to slow the depreciation of your car until you consider reselling it.
Your third option is to lease. In leasing, you essentially pay only for the depreciation of the new car. When you are done your 2 or 3-year lease, you can walk away and begin again on another new car. Leasing appeals to many people for reasons that may or may not be financial; some of the benefits have to do with lifestyle, or risk aversion, or just wanting to try out new cars. Don’t be quick to judge or dismiss leasing as a possibility for you. Though it does not build equity like owning a car does, it can offer other benefits that may be of value to you.
Know that from the moment you buy your next car, you are prepping it for resale down the road. Care for it thoroughly, maintain it regularly, and keep organized records of service- but most of all, enjoy it! No matter how you acquire your next car, let Car Buying Strategies walk with you through that process. Expertise goes a long way in this industry and Car Buying Strategies has it- guides, tips and advice, whether you’re buying new or used.