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.
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.
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.