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.
Just how volatile can rates be? The National Automobile Dealers Association (NADA) produced a study in 2012 that charted used car depreciation fluctuation. Consider the following chart, which shows average annual depreciation rates on a $12,000 car from 2005 to 2011.
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 Martin Davis