This post was originally published on this site
New vehicle prices give some car shoppers sticker shock, especially when they realize that the value of their new ride significantly drops the moment it’s driven off the dealer’s lot.
A vehicle’s loss in value over time is unavoidable. However, savvy buyers can save thousands when they purchase a nearly new model after the vehicle’s initial steep depreciation and then sell or trade-in before the value significantly falls again a few years later.
Read on for tips on beating car depreciation and learn how it fits into the overall cost of car ownership.
What is car depreciation?
Like other goods that become worn down through regular use, a car loses some of its value each year through the everyday wear and tear that comes with aging. This loss in value is known as car depreciation.
The rate of car depreciation varies depending on the vehicle’s year, make, and model. The first year faces the most significant depreciation hit to the car’s market value, with most vehicles losing about 20% or more of their original value. The loss continues to decline from there. Cars often shed about 60% of their original purchase price within the first five years.
Don’t miss: From auto mechanic to money adviser: How one financial planner shifted into a new gear
When the time comes to sell your car, you may find that depreciation has greatly reduced the expected trade-in value for what could still be a well-functioning automobile.
A car’s trade-in value is the amount of money an auto dealer is willing to deduct from the purchase price of a new or used automobile in trade for your existing vehicle. The trade-in amount is based on several criteria, including the make and model of the car, its age, and its condition at the time of the trade.
Other factors can affect a vehicle’s market value, too. For example, supply chain disruptions stemming from the COVID-19 pandemic created a shortage of computer chips needed for new cars. As a result, the reduced inventory of new cars increased demand — and increased prices — for used vehicles.
How to use depreciation to your advantage
Because of depreciation, the older your car is at the time of trade-in, the less credit toward a new purchase you’re likely to receive and the less money potential buyers are willing to pay in a private sale.
Holding on to your car for longer than average can sometimes be a benefit at trade-in time if the vehicle is in good condition. However, the rate of depreciation tends to slow after the odometer hits 100,000 miles. Of course, there are a few exceptions, with top-rated and desirable vehicles like some pickup trucks receiving higher trade-in deals.
Smart buyers looking for a good deal can make car depreciation work in their favor. Used cars are much lower in price than new cars because depreciation affects a vehicle regardless of its condition. You can purchase a 1-year-old car that’s nearly as good as when it was new, but pay only 80% or so of the original price.
Also see: Avoid these 10 common mistakes when buying car insurance
Buying a used car from the current model year or the previous model year is the best strategy for shoppers wanting to beat car depreciation while still tapping into the remainder of the initial factory warranty. Choosing a vehicle from a manufacturer’s certified preowned program can be a good option. CPO cars have met strict inspection guidelines and other criteria to qualify for the designation.
Car depreciation hacks
Car owners should understand car depreciation to help manage the loss of value when they sell or trade their vehicles. To help keep resale value higher, sellers can consider these tips for minimizing car depreciation.
- Maintain your car. Keeping records of regular maintenance shows responsible car ownership, which helps the value of the vehicle.
- Sell the car yourself. Convenience is a factor when trading in your car at the dealership. However, a private sale allows you to sell at market value and keep the costs the dealer builds into the price of the used car.
- Don’t customize your car. Aftermarket customization shows off your style, but it also limits the number of potential buyers. Avoid flashy add-ons to keep your car attractive to the majority of used-car buyers.
- Look for tax breaks. If you use your vehicle in your business or a side gig, check with your tax adviser about the possibility of deducting a portion of the car’s depreciation on your tax return.
The cost of owning a car
Car depreciation is one part of what it costs to own a vehicle. Along with the loss of value, you’ll have out-of-pocket expenses such as fuel, maintenance, repairs, and insurance. Knowing the overall cost of owning a vehicle ahead of time can help you save money in the long run.
Also read: Here’s how to live rent-free in a historic home
Even if two new vehicles are priced the same, one can have a greater loss of value over time. Before buying a car, use KBB’s 5-Year Cost to Own tool to compare vehicles’ total cost of ownership, including a car depreciation calculator.
For example, a 2020 Subaru
FUJHY,
Forester in the compact SUV class has a 5-year cost-to-own figure of $34,119, including $14,255 in depreciation. By comparison, a 2020 Hyundai
HYMTF,
Tucson SE costs $2,000 more over five years, due in part to greater depreciation of $15,407.
See: This is the electric car that costs the least over 5 years
Why car depreciation matters
The good thing about depreciation is that it only matters when you get rid of the car. Its value comes into play when you sell the automobile, trade it to offset the price of a different vehicle, or when your insurance company “totals” the car after a significant accident.
Until then, there isn’t much need to be concerned about how much your car is worth now compared with when you first bought it. The car will continue to depreciate until it is no longer usable. And even cars that aren’t drivable are worth something at the junkyard.
Also on MarketWatch: How much should I invest? Getting started investing
When buying a used car, it’s a good idea to consider the age of a vehicle and the number on its odometer. It’s even more important to look at how well the owner maintained the vehicle. A 10-year-old car with 100,000 miles may have received more TLC than a 5-year-old model with 50,000 miles.
While you cannot avoid it, you can fight off car depreciation by taking good care of your investment. Keep that in mind before it’s time to get rid of your ride.
This story originally ran on KBB.com.
