Car Depreciation: 5 Things to Consider

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Let’s face it, there’s no rosy spin one can put a car’s depreciation. Whether new or used, all cars lose value. But used car buyers have some advantages and can fare well if they do their homework.

Here are five things to know about depreciation and buying used cars that will have you sitting pretty in the driver’s seat.

1. Depreciation Starts The Moment You Drive Off The Lot

The minute a person drives a new car off the lot it loses approximately 10 percent of its value. By the end of the first year, that car will lose an additional 10 percent on average.

But this number is not fixed. Cars with less brand-name appeal and few options can be hit much harder, depreciating by as much as 50 percent in some cases. So when you buy a car that’s less than two years old, be sure to know how much it has decreased in value.

Don’t be fooled into thinking depreciation slows much after the first year. The fact is, new cars continue to lose value for four more years, averaging a decline of 15-25 percent per year. On average, a new car will lose 60 percent of its total value over the first five years of its life.

So yes, if you buy a fairly new used car you won’t take that first-year hit, but you will take hits until the car reaches five years of age. Another way to look at it is: How much money can you save (and how much car can your purchase) by finding that sweet spot between a car’s age and the number of miles it has on the odometer?

2. The Economics of Used-Car Depreciation

The fact that new cars lose 20 percent of their value the first year has been fairly constant over time. Your father could bank on it, and so can your daughter when she buys her first car. However, when a new car becomes a used car the dynamics of depreciation become a more complicated game. Just as with any commodity, used cars are affected by supply and demand.

At the turn of the millennium, for example, new cars were being rolled out at a rate that far exceeded demand, so leasing became popular. As leases lapsed, the used car market swelled, and with it the depreciation used car buyers faced. In other words, cars depreciated more quickly because the demand for used cars was low. Things leveled off for a while, but the recession of 2008 sent depreciation rates soaring once again.

Beyond market forces you can’t control, psychology also has a role to play in how much your car’s value drops year to year. Cars that are popular with the public fare much better than those deemed less desirable.

What’s perceived as popular, of course, can shift from year to year, so there’s a bit of a risk with any used car you buy. What may be deemed a hot used car this year may not be so hot the next if problems with the car emerge or if demand drops. Suddenly, that car that held its value well could begin to depreciate at a significantly faster rate.

So don’t expect your used car to depreciate at a consistent level. A lot can change.

3. What To Look For In Your Used Car

Clearly, your car’s value is subject to economic and market forces that you have little control over. However, there are other factor you can control.

Let’s start with fuel economy. At the time of this writing, gas prices are reaching near-historic lows, but buyers haven’t forgotten the pain of paying $4 per gallon. Additionally, and many of us have seen prices jump up and down in the past, so we know this period of cheap gasoline can’t last forever. As a result, it makes sense to be mindful of fuel economy when you’re car shopping.

The number of miles you drive will also factor in. The fewer miles on the car, the better your odds of trimming your depreciation. A good rule of thumb is 10,000 miles per year. That might seem like a strict limit if you have a long commute or live in an area where you have to drive everywhere you go, but the lower the mileage on the car, the more it’s going to be worth.

Finally, consider a neutral color. If you’re really worried about depreciation, think twice before you buy that used Charger in “Dukes of Hazard” orange. You may like it, but when it comes time to sell, you’re going to significantly reduce the number of folks willing to buy it.

4. Keep It Clean

Imagine you’re on a used car lot and you sit in a vehicle with frayed carpet, a cracked dashboard and dull mirrors. Chances are you’re going to look elsewhere, and there’s a good chance that other buyers will too.

The motor may purr, the tires may be in mint condition and the transmission could be in perfect working order, but buyers want to feel good about the car they drive. They’ll also pay more for a car with a properly maintained interior. Using a little elbow grease, Armor All and Windex to keep your car clean can have a big impact on its value when it’s time to sell.

5. Look for Cars that are Loaded with Features

It’s not uncommon for new car buyers to skip a few options to keep the car’s price low. However, it pays to look for cars with extra features if you’re shopping for a used vehicle. In particular, you may want to keep your eyes peeled for cars that are equipped with optional safety features. You’ll pay a bit more, but cars with strong safety features will hold their value better over the long haul.

By | 2018-08-10T17:59:19+00:00 May 18th, 2017|Car Buying|10 Comments

10 Comments

  1. Franics May 25, 2017 at 8:13 am - Reply

    I love the way you let the public learn ideas about buying cars! 🙂

  2. LNweaver July 10, 2017 at 9:47 pm - Reply

    I didn’t know that extreme colors were less palatable to buyers. I heard that bright colors are stopped by the police more often. Maybe that plays a role?

    • Martin August 10, 2017 at 2:48 pm - Reply

      I would favour an uncommon colour simply because they are easier to find in a car park.

  3. John S September 19, 2017 at 10:26 am - Reply

    We bought a car with lot’s of bells and whistle and it never helped depreciation. Clearly the vehicles that are popular hold their value more. Also steer clear of the long term loans which tend to keep you upside down much longer. If you decide that vehicle is not the best choice, you may be stuck with it for years until it gains some value over what you owe. Personally I think 60 months should be the max on a car loan, with 48 month being ideal for people who like new vehicles more frequently. Don’t get suckered into a 72 month or longer just to lower payment. Pick a cheaper vehicle you can afford with shorter terms.

  4. Alexa October 11, 2017 at 11:57 pm - Reply

    I wish I read about car popularity before purchasing my vehicle a few years ago. I purchased a certified pre-owned Volvo in 2014 with 22,000 miles for $26,000… 3 years later the car is worth $5,000 with 85,000 miles. The company stopped making the model of my car on top of the lack of demand for Volvo’s, it’s sad to know I stilll owe more in my 5 year financal agreement than the car is even worth. I bought the car because I had a honda civic prior and it was totaled from an accident at 10MPH. Honda and many other popular manufacturers do not produce vehicles that survive minor accidents and that is why I chose Volvo because of the safety and reliable construction Incase of a major accident. The depreciation though is beyond concerning… I chose a safe car because the “popular” cars on the road like civics and camrys are not safe in accidents. My Volvo will withstand an accident much better however is valued so much lower. How do we value cars that are cheaper to purchase and not safe as more valuable than a car that is?

    • John July 31, 2018 at 11:31 am - Reply

      The reason why many cars don’t survive or are “totaled” after minor accidents and worse is because of the crumple zones. They’re designed to absorb as much of the energy as possible so you and other passengers don’t feel it. Unfortunately, absorbing all that energy can have devastating effects to the car. In contrast, look at the car crashes in NASCAR or other car races. They’re designed to be rigid and w/o crumple zones so when the crash, the driver would die if not for the thousands of dollars of safety gear.

  5. Tom G. February 27, 2018 at 4:16 pm - Reply

    The resale value of a car is also impacted by the maintenance costs, and the current crop of Volvo’s have earned a reputation for having brutally high repair costs. Once out of warranty, their resale value plummets because the owner is now 100% on the hook if the car breaks.

  6. Janice Chiaretto July 3, 2018 at 2:39 pm - Reply

    For me, a committed used car buyer, my priorities are thus: Get a terrific, loaded car, well maintained with 60K or less mileage ; If worked out correctly, you should find something with 4-5 years of depreciation to keep the price low; pay cash or take a short term note if the interest rates are favorable but do not take a long note that puts you “upside down” as stated in this article; stick to what you really want and need and do not worry too much about resale. You may get to keep the car a good long time to the point where it isn’t worth much anyway (or if in good shape give it to your college kid). If you think you will turn cars over every 4-5 years then consider leasing, or worry far more about what makes the vehicle “popular”. Otherwise make yourself happy – life is short. 🙂 Why anyone buys a brand new car is beyond me. Just not a good use of funds.

    :

  7. Dominick July 17, 2018 at 12:25 pm - Reply

    Janice,I agree, it is not a $$ wise investment just piece of mind when buying a new vehicle. I loved leasing my trucks, then my commute to work became longer and could no longer lease. I financed my current truck, but need to go from a quad cab to a crew and I am considering buying used, but it baffels me as to trucks with 100,000 miles are selling in the $20,000 and up range?? I do 23,000 miles a year and would love to find a truck with low miles and keep it for two years three max then trade it in, any tips??

  8. Robert Downey August 30, 2018 at 11:52 am - Reply

    I think personally that it should be a crime for dealerships to sell their vehicles for what they do. I understand how depreciation Works however when I spend $40, 000 for a vehicle and 3 months later it’s worth half what I actually paid.. give me a break. Even worse you buy the car and one month later the auto manufacturer is now offering $12, 000 discounts on the vehicle? They know their cars aren’t worth what they’re selling them for to me that’s a form of embezzlement.
    what’s even more criminal is that if you bought a vehicle from a dealership for $40, 000 and you take it back to the same dealership a year later or two years later and want to trade it in, they don’t even use the standards like NADA or Kelley Blue Book to value your car. so let’s say that $40, 000 vehicle comes back on Kelley Blue Book at $19, 000 the dealership may only offer you 12 because they can buy it at auction for that. so what I bought the vehicle from you you’ve maintained the vehicle and know what condition is in which you will not know from an auction so you should give your customers a loyalty incentive to continue buying from you.
    in the 1980s and 90s you could buy a vehicle and the average depreciation was 5 to $6, 000 a year not per month.
    I think if everybody just bought the vehicle they want and just hang on to it till the wheels fall off the car dealerships would have no choice but to start making their cars a lower-cost. it’s completely ridiculous that a domestic vehicle now costs you an average of $35, 000 when the same car 10 years ago would cost you fifteen thousand. it’s no wonder the domestic manufacturers only bankrupt and needed a government bailout. and all those fancy bells and whistles that they tell you to get when you buy a car they don’t mean anything when you go to trade it in if anything it actually causes the owner problems because those bells and whistles are just more things that break on a daily basis that you have to constantly get fixed.
    My recommendation is this, do your homework and find the vehicle that you really want as your Forever vehicle. Save up to you can afford to put a down payment down and buy it and then keep it. Stop playing the dealership game. they want to make you think they only get $120 from the manufacturer for selling it and that’s garbage. even if it were true then the dealerships should start carrying foreign cars to force the manufacturers to drop their costs on selling the vehicles to the dealerships. With most of the factories being automated they don’t have hellacious labor costs so why does it cost so much?

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