No other asset depreciates quite like a car. Kelley Blue Book reports that most cars lose 20% of their value in the 1st year, and 60% within 5 years.
Cars depreciate even faster than you can repay your loan. If financing a new car over 5 years, with no deposit, you will be in negative equity for about 4 years.
It’s no fun owing more on your car than it’s worth. There is a serious risk of financial hardship in the event of a total loss. Finance companies will pursue borrowers for any shortfall. Who wants to pay for a car that you can’t drive?
Thankfully there are some strategies to car buying that can help. Here are some ideas to reduce your depreciation experience, and any potential shortfall in equity.
Buy Used
New cars depreciating 20% in their first year is tragic. What could be worse? Well, most of this happens as you drive the car off the dealers lot. Somewhere between purchasing your Moneysupermarket car insurance and filling up for the first time, you will have lost most of this value.
Depreciation is a relative concept. It is measured against your purchase price. Cars depreciate comparatively less in their 2nd and subsequent years of life.
By purchasing 1-2 year old cars, your depreciation experience will be slower, or favorable when compared to the new car experience. You will miss the latest features, and won’t enjoy that new car smell. But, you will enjoy a slower relative decline in your asset value.
Seek Fuel Efficiency
This has nothing to do with the price of oil, or the future direction of gasoline costs. This is all about CAFE standards.
The Federal Government, with the EPA and NHTSA, sets Corporate Average Fuel Economy Standards (CAFE). These are the fuel efficiency targets that auto manufacturers must achieve if they want to sell cars in the USA.
They are currently set at 30.2 MPG for cars and 24.1MPG for trucks. The mix of vehicles sold by each manufacturer must achieve these targets today. These have not changed significantly for 40 years.
However, between now and 2016 the Federally mandated targets are increasing very rapidly. The new CAFE standards for 2016 are 38 MPG for cars and 29 MPG for trucks.
If you purchase a vehicle with less than average fuel economy, there will be less demand for it going forward compared to more efficient models. This will result in a faster rate of depreciation.
This is simple supply and demand. One way to beat the averages is to be aware of market trends and get ahead of them. Fuel efficiency is a clear winner.
100,000 Miles
Most people get rid of their new cars by 75,000 miles. At this point, the average car would be about 5 years old, and already lost 60% of its value to depreciation.
If you can hang on to your vehicle until the mileage approaches 100,000 you will realize significant gains. The depreciation rate slows rapidly beyond this point, so your asset value well be well-preserved going forward. Also, Edmunds.com reports that incremental maintenance costs are very low from 75,000 to 100,000 miles. So you can expect to save on repairs too.
Please share your ideas and opinions of ways to slow the depreciation of your car.
Related Articles:
Less Is More: From 2 Cars to 1
Buy Used And Save The Difference – Thursday’s
Tip of the Day
Hey Hunter,
You have many good points. I think the most important (and probably why you mention it first) method is to buy used. You let the original purchaser take the big hit on the chin.
I have a drive it until the wheels fall off philosophy, and it has been working quite well for me
! If you purchase the right car, there is no reason why you can’t drag the thing to 200,000 miles with very minimal repair. Just do the standard preventative maintenance and you should be fine (especially if they are highway miles).
I just saw one of my biggest pet peeves on a flyer today for a car detailer. it said “Take care of your investment.” I hate when cars are referred to as investments. Investopedia defines investments as:
“An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.”
And while some might argue that the vehicle is used to create future wealth by getting you to work, but I consider that a stretch. I usually direct people to look up the definition of “depreciating asset” and tell me if that doesn’t fit slightly better, lol.
Thanks,
Timothy
There really is no way most of us could classify cars as investments. The auto industry marketing people would want to us to believe we are investing when we buy a car. But, as you say, they are really just expensive depreciating assets.
When buying used, rather than choose a 2 year old model, why not aggressively avoid depreciation and go for the 5 year old model. As long as there are no mechanical problems on the immediate horizon, this is a cost effective way to proceed. There are plenty of fuel efficient options in that vintage too.
Those are some great tips! I’m dragging my truck out as long as I can. 130K and still functioning. Did recently get a brake job and change my tires. Still rolling along. Thanks for including my auto insurance links. Hope it helps your readers!
The video of that guy doing auto insurance shopping is so funny. It woild be refreshing if more people were this honest with their insurers…and very funny.
My husband and I always get as much use out of our cars as possible. Whenever we sell a car I complain that we don’t get anything out of it… but then I realize why. If it still had value we would be driving it!
I know what you mean Ashley. There seems to be a tipping point, beyond which a dealer will give you next to nothing for your trade-in. Still, if you are updating, it’s better to get rid of your old ride than pay insurance, taxes, etc on something you don’t really need.
Hunter, I especially like the buy and hold mentality….over 100k is key. You just gotta find a car that will last that long. When I’m car shopping myself, I always look for something with a higher residual value (one of the reasons I’ve always been a Honda man). Of course, since I hold onto them for so long the residual value doesn’t matter so much in terms of resale value….more in terms of just knowing which cars will last me longer…..
We like Honda too, we have two of them now. Strong residual value was a factor in our purchase decision. We also love Honda service. I grew up with Ford’s. Switching to Honda has been a very pleasing transition.
I just checked the blue book value on my car and I am about 2k underwater! The good thing is, I don’t plan to sell any time soo and I will catch up in a few months. I’m already over 100k and I hope to get at least 180 out of it! It’s a Mazda and I previously had a Toyota that I ran until about 212k.
It sounds like you squeeze all the possible life out of your cars LaTisha. Unfortunately, military moves overseas and back have forced us to sell prematurely, more than once. It’s an expensive evolution and we’re about to through it again in12 months. At least this time we own one car, and above water on the other.
Great tips! I would guess that typically the longer you hold on to a car, the better value you get, correct?
If you are going to buy new, check the resale value of the car in general. Certain cars, like Hondas, have much higher resale value than comparable American brands.
[...] Hunter at Financially Consumed showed us how to reduce the depreciation costs on our cars. [...]
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The problem is reliability. Buying a used car 5 years old with 60,000 miles is a good idea if you know the car was maintained well. Otherwise you will have a new problem and headache every month and spend thousands of dollars repairing the car versus just buying a newer car. If the person did all routine maintenance on the car buying a 5 year old car is best, but how can you be sure, it’s a gamble. I prefer to buy a car 1-2 years old, I figure you save a lot versus buying new and since really the only thing that needs to be done during that time is oil changes, it’s easy enough to find someone who changed their oil.
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