If you want a quick way to lose $2,500, go buy a new car and drive it off the dealer’s lot. Boom! The very second the car hits the road, it loses anywhere from 10% to 15% of its value, depending on the type, make and model and other factors beyond your control. But it doesn’t end there. The car will lose 15% a year for the next two years. After five years, it will lose as much as 60% of its value. The culprit behind the loss is depreciation. If you buy a car, new or used, you can’t escape it. But, there may be some things you can do to minimize it.
Should You Care About Depreciation?
The first thing to understand is, if you plan to drive your car until the wheels fall off, you shouldn’t be concerned with depreciation. After eight to 10 years, depreciation has pretty much run its course. At that point, your car’s value is based purely on its merits, including the desirability of the model and its condition. However, if you plan to sell your car within a few years of purchasing it, depreciation can wreak havoc on your finances. For instance, if you financed your car for 100% of its value, you will likely be upside down in your loan as soon as you drive off the lot. If you try to sell it within a couple years, it’s possible you could owe more on the car than it’s worth in the marketplace. Worse, if you drive off the lot and total your car in an accident, your insurance company might only replace the market value of your car, which could be several thousand dollars less than your loan balance.
Why Cars Depreciate in Value
Depreciation is the result of several factors which can vary from one car type or model to the next and from one year to the next. Some cars depreciate faster than others and the rate of depreciation can be affected by economic factors, such as fuel prices and the pace of auto sales. A hybrid or high-mileage car will depreciate much more slowly or even increase in value when fuel prices rise, while an SUV could experience faster depreciation. A car model that suddenly loses its appeal or is replaced by new souped-up version could see its depreciation accelerate.
How to Limit Depreciation
When buying a car, it is important to understand its depreciation potential if you plan on selling it within five years. Some car brands generally hold their value better than others. Kelly Blue Book cites Toyota and Porsche as the top brands for retaining value in 2017. But that could change next year. Car features can also affect depreciation. Cars with an abundance of safety features are popular on the resale market. But, if it screams a bright orange color, it is likely to attract fewer buyers.
Smart car buyers know that they can avoid an instant 20% loss of equity by simply waiting a year to buy their desired car in “lightly used” condition. In many cases, you can buy a late model used car with most of the same bells and whistles as a new model, but without the first-year depreciation baggage. However, it is important to remember that depreciation actually accelerates after the first year. Again, several factors come into play, such as the age, type, model, mileage, condition and market demand of the car. With some thorough research, you can find the sweet spot among those factors that offers the best value with the lowest potential depreciation.
Written By: Richard Best
Writer For: Easy.Credit