Used Cars, New Cars and Depreciation
When it comes to buying a car, the age-old question is this: Should you buy a new car or a used car? There is one thing that really tips the scale in favor of buying a particular kind of used car: Depreciation. This article will explain what depreciation is, how it applies to cars, and why it makes buying certain used cars a great opportunity.
Most assets that you buy lose value over time from wear and tear, and that loss of value over time is the definition of depreciation. This is especially true of cars. According to CARFAX, when you purchase a brand new car for $20,000, the moment you drive it off the lot it depreciates 10% on average, which means now it’s only with $18,000. That also means your car is now worth less than what you still owe on your car loan, assuming you financed it. It continues to depreciate more over the course of the first year of ownership, usually by another 10%, which means after 12 months the car is worth only $16,000, and you still have negative equity since you’ve only made a dozen payments on your loan. And then the car continues to depreciate by anywhere from 15-25% a year for another four years, which means it’s pretty common for a new car to be worth less than 40% of what you paid for it new after owning it for five years.
This is why buying a nearly new (or slightly used) car can make a lot of sense. You let the person who bought the car brand new take the biggest hit of depreciation in the first few years, giving you a nearly new car at a much lower price, and you get to enjoy a number of other benefits, such as the car being in good condition, still retaining some of the original warranty, better financing rates, and so on.
It’s also important to realize, however, that not all cars depreciate at the same rate as the averages mention above. Less popular vehicles with fewer options will depreciate much faster than cars loaded with options (especially added safety features) with strong brand-name appeal. It’s also true that what’s considered a “hot” used car can change from year to year, so there’s always a bit of a gamble involved. One thing you can always count on, though, is big depreciation on highline cars – Porsche, BMW, Jaguar, Ferrari, Lamborghini, and so on.
One thing you can do when checking out used cars for sale is to keep the color in mind. Bright crazy colors are harder to sell, so stick with more neutral colors and the car will end up being worth more than one that’s neon orange. In our experience with cars here in California, white is a very popular color, which means white cars depreciate less than other colors.
Once you’ve found the used car that works for you, there are some things you can do to minimize its further depreciation as much as possible. Perform all regularly scheduled maintenance and keep all your service records – buyers like to be able to see that a car was well-maintained. Something else that’s important is to keep your vehicle clean. Any car with an interior that’s not in great shape is going to be worth a lot less than one that has been kept clean and in good condition.
Depreciation can feel like a depressing topic when you want to buy a brand new car, but it’s like music to the ears of people looking to buy nearly new used cars.