Hey Car Buyers: Let’s Talk Depreciation
Get ready to hear the single most crucial piece of advice about getting a good deal on a car. If you understand the truth of the matter, it will radically change your strategy for car shopping forever—saving you countless dollars and lots of heartache. Here it is:
The purchase price is mostly irrelevant.
Whether you spend a couple of thousand bucks for an old jalopy—or an arm and a leg for a luxury sports car—the amount you fork over on Day One is not what the car really costs. The expense of using and driving that car is not determined by the number on the window-sticker price or the level of negotiating skill you employ when haggling for a good deal with a sales agent.
No, what counts is the difference between what you paid for the car and how much you get back when you sell it.
Of course, buying a more fuel-efficient car will save you some money at the pumps just as choosing a vehicle with a better reliability record will likely reduce the expense for maintenance and repairs. But the largest expense can’t be calculated until you determine the price you get when passing the keys to the next owner—and subtract that dollar amount from what you first spent.
Focus on the Cost Per Year
As you can see, I’m avoiding mention of the D word. For some reason, using the word “depreciation” causes most people’s eyes to glaze over. And it doesn’t help to explain that depreciation is defined as how much of a vehicle’s value is used over time.
Let’s try this a different way, using a simple comparison. Consider two different car buyers both buying a $30,000 vehicle today. The first person buys a car or SUV and five years later sells it for $18,000. In this example, the cost of the vehicle for those 60 months is $12,000. Bingo: $2,400 a year is what you’re spending on depreciation (in addition to fuel, insurance, and other costs). That’s the figure to focus on.
In a second example, the vehicle car sells for $21,000 five years later. Why did the second owner get $3,000 more than the first owner? Perhaps the second owner put fewer miles on this vehicle or took immaculate care of it so that the car looks like new. Regardless, the cost for those 60 months, in this case, is $9,000 or $1,800 a year. The second dude spent less over time and therefore got a better deal for the same vehicle.
Drivers who lease rather than buy might have a better sense of the annual (or monthly cost). That’s because the very purpose of a lease is to spread the payment of the loss in value into predetermined chunks over multiple years rather than realizing the loss all at once when you sell your car or trade it in.
A Better Way?
It’s relatively obvious to track your annual cost for fuel, maintenance, repairs, insurance, license and registration, and loan interest. But that won’t do you much good if you overlook the expense that represents about 40 percent of your expenses—namely, the delta in value from first acquiring the car to the day you sell it.
Is there any way to avoid depreciation? In a word, no. There are rare instances of vintage vehicles catching on with collectors and thereby selling for more than what you paid. But according to AAA, Carfax, and other organizations that study car depreciation, on average you can expect a car to lose more than 20 percent of its value in the first year and as much as 40 percent of the original purchase price after five years.
You might find advice about how to minimize depreciation. Here are the prime examples:
Don’t buy a car that has odd colors or an unusual design that will reduce its appeal or price when you are ready to sell it.
SUVs are more popular than sedans these days. As a result, the value of vehicles that are in vogue will depreciate slower than models out of fashion.
A vehicle that’s been well maintained (with detailed service records) and with lower miles on the odometer will retain more of its value.
It’s advantageous to buy a used car that’s already suffered the biggest decline in value and drive it for as many years as possible.
The problem with this advice is that you might prefer a sedan over an SUV, or your commute might require that you put more miles on your vehicle. It doesn’t make sense to drive a car or truck that doesn’t serve your needs or that you don’t enjoy—even if you can fetch a better price at the end of your ownership period.
And even if you buy with the idea of minimizing depreciation, a single accident (which will show up on a vehicle-history report) will dramatically reduce the price you get for the vehicle. In other words, there are numerous pitfalls. For example, you could get stuck trying to sell a gas-guzzler just when gas prices suddenly spike.
It’s almost impossible to second-guess where the consumer preferences might go in the future. Regardless, it takes a commitment of time and energy, as well as bargaining acumen, to sell a car at its highest price.
Perhaps the biggest challenge faces consumers who want to sell a car or return a leased vehicle after only a year or so. That scenario is nearly guaranteed to leave you carrying a hefty bill for steep depreciation.
Motorists that want the flexibility to drive a vehicle only for a year or two are best served by one of the new alternative modes of car access—specifically an all-inclusive monthly car subscription.
Car subscriptions start as low as about $350 a month for a budget car or $550 for an SUV or truck. Even when you add about $50 or more for the subscription plan, it stacks up favorably when realizing that you don’t have to make a big down payment or suffer unpredictable drops in value, or even think about the hassle of selling the car when you’re ready for your next vehicle. And insurance, maintenance, and registration are included in the deal.
No matter which approach you take, the key is to shine light on the dreaded concept of vehicle depreciation. If you understand how depreciation works and that it’s the biggest cost, you are already way ahead of the game.