Buying a new car can be an exciting prospect. Having something that no one has previously owned or used can elicit pride. But new car buyers are no doubt familiar with the conventional wisdom that, the moment a new car leaves the dealership, it loses a considerable amount of its value. Drivers may be surprised at just how much and how quickly that value drops.
According to Capital One®, car value can depreciate as much as 20 to 30 percent in the first year. The rate at which cars lose value after the first year is not as steep, and can be influenced by factors like age, mileage and how well the car has been maintained. However, Kelley Blue Book® says cars generally shed about 60 percent of their original purchase price within the first five years.
A snapshot of how average depreciation works for a sedan can paint a clearer picture. Here is the value of a sedan over five years, according to Edmunds.
Full price: $30,000
1 year: $24,300
2 years: $20,700
3 years: $17,400
4 years: $14,700
5 years: $12,000
If a person is planning to keep a vehicle for the long haul, depreciation may not be much of a concern. However, for those who may not plan on holding on to a car for long, it is important to know about
depreciation and how it affects car resale value and the total cost of owning the car. For example, if a person borrowed money to buy a vehicle and decides to sell it shortly thereafter, he or she might end up upside down on the loan or owe more money than the car is worth. Car depreciation also can affect trade-in value when moving on to a new car.
One of the ways to avoid the perils of depreciation is to purchase a used car, since depreciation will have largely been absorbed by the previous owner. Another way to mitigate depreciation is to purchase a vehicle that has a slower rate of depreciation. CarFax® says that when SUVs and trucks are in higher demand than sedans and compacts, they will retain their value longer. When fuel prices rise and cars that are more fuel-efficient are in demand, the reverse is true.
Ways to reduce depreciation include:
• driving the vehicle around 10,000 miles a year;
• keeping up with maintenence, such as oil changes and replacing worn out parts;
• buying new cars with high levels of safety technology, which can help a car retain more value over the first five years; and
• researching Kelley Blue Book’s Best Resale Value Awards to see which vehicles hold their value the most.
Vehicle depreciation is something all new car buyers should be aware of when they are shopping for their new automobiles.