Understanding Vehicle Depreciation

By Eric Peters, Automotive Columnist

When people go car shopping, they tend to focus on the sticker price — and how to haggle it down. That’s important, but don’t forget to factor depreciation rates into your new car buying equation.

The average new car loses about 10-20 percent of its value during the first year you own it — and might be worth as little as 50 percent of its original MSRP after about five years.

This is bad news no matter who you are, but if you still owe on the loan, it can be an especially hard hit. That’s because you may find yourself “upside down” — owing more on the car than the car it’s currently worth

Depreciation rates correlate to factors such as the perceived desirability of the vehicle (which affects resale demand and thus prices on the used car market), consumer satisfaction scores (as expressed by sources such as J.D. Power & Associates, Consumer Reports ratings, etc.), and the make/model’s general reputation for quality and reliability.

Model year changeovers and vehicle updates can also have a big effect on depreciation rates. Let’s say, for instance, you just bought a 2010 model “X.” But next year, the manufacturer heavily updates model “X.” The 2011 version has a more powerful engine, or more amenities and features that weren’t available in the previous generation model “X.” The existence of the more-up-to-date/more desirable 2011 model “X” will likely cause the value of older Model “X’s” such as yours to dip — because most buyers will want the newer version.

But, this can also work the other way — and to your advantage — if the newer version of the vehicle you’re driving is a flop, or just not as popular. As an example: When Nissan revised its Frontier pick-up for 2005 — making it considerably larger, among other things — the value of the 2004 and older Frontiers actually went up, because many buyers preferred the more compact version of the Frontier.

To avoid getting sucker-punched by higher-than-average depreciation, always do a little research into how well (or poorly) the specific make/model car you’re considering has held its value in the past. This is usually a good barometer about future trends (though not always).

Check retail/wholesale average used car prices for the make/mode you’re considering as listed by the National Automobile Dealers Association and the Kelley Blue Book. Go about 5-6 model years back and see how well (or not) the vehicle has maintained its value.

This will give you a very good feel for industry trends — and alert you to cars (and brands) whose value tends to drop faster than average.

Also, since lease costs reflect expected depreciation as projected by experts (the finance guys who write the leases), you can learn a great deal about a given vehicle’s ability to hold its value by looking into the cost of a lease contract for that vehicle. In general, the lower the residual value — that is, what the vehicle is anticipated to be worth at the end of the lease — the higher its rate of depreciation (and usually, the more costly the lease).

Also hip yourself to model changeovers and updates. This info is easily found by reading the industry press (Motor Trend, Car & Driver, new car reviews on the ‘Net). Be aware that while you can often negotiate a fantastic “out the door” price on a current-year model that’s about to be replaced by a newer/updated version — the down-the-road value of your “old” model is likely to drop faster — and be lower.

Finally, you can dodge depreciation simply by avoiding new cars altogether. Usually, the only thing you’ll miss out on is that “new car smell” — because current cars are (in general, there are occasional lemons) so well-built that a slightly-used 2-3 year old vehicle with say 30,000 miles on it is a good bet for another 8-10 years and an additional 100,000 miles. Even though such a car may still have as much as 80-90 percent of its useful service life left to go, you’ll often pay 20-30 percent less than the guy who bought it new.

Sometimes, it’s a lot smarter to let someone else be the first one behind the wheel!


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