Managing the Hidden Costs of Car Depreciation

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Car depreciation can be costly, but there are strategies to manage the declining value of the car you drive.

The car owner is not a friend of time. A car’s value decreases over time, unlike other assets. This is known as depreciation.

While it’s an expensive part of the total cost of owning a car, you only feel the effect when you sell or trade it in. This article will explain what depreciation is for car owners and how to manage it.

New-car depreciation

As soon as you leave the lot, depreciation starts.

The first year will see a decrease in the car’s value of around 20% to 30%. According to Black Book data, which tracks the price of used cars, depreciation can range from 15% to 18% each year from years 2 to 6. A rule of thumb is that cars lose 60% to 60% within five years.

However, not all vehicles are depreciating at the same pace. This means that some makes and models retain their value better than others. Depreciation rates may also fluctuate over time.

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As a result, large SUVs and pickup trucks can see their value drop when gas prices rise. This is because fewer buyers will pay for the gas-guzzler. Due to the large number of returned lease vehicles, depreciation rates can accelerate on these models.

Leasing is a great way to look at depreciation. The price of a car you lease is determined by how much you use it, which is basically the depreciation.

The residual value of a car is the amount it will be worth after you have completed your lease term. Cars typically have residual values between 40% and 60% after three years (though market value could be higher).

Strategies to reduce depreciation

Although this decline in vehicle value may seem drastic, there are ways to manage it.

BUYING USED

Because of the steep drop in value over the first year, a brand-new car is most likely to depreciate. A car less than one year old will avoid the first depreciation hit and can save you significant money over buying a new car. The owner could also save around half the original car’s price by waiting beyond three years.

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RESEARCH RESALE VALUE

The depreciation curve can be manipulated to benefit smart new-car buyers. According to iSeeCars’ analysis, the Chevrolet Colorado lost 7% in its first year of 2016. You can also look for steep discounts such as the Volvo S60 which saw a 34.4% drop in depreciation in its first year in 2016, slashing around $14,000 in one year.

To find out how much certain models depreciate, you can use tools such as Edmunds.com’s true costs to own calculators or Kelley Blue Book’s five-year cost of ownership.

LEASING

To drive a car, you don’t need to purchase it. You pay the depreciation of the car, plus taxes and interest. If your vehicle’s market value drops unexpectedly, you can just turn it in at the end of the lease term.

You could also be lucky because the purchase price at termination of the lease agreement is fixed at the beginning. You can choose to keep the car and make a profit or buy it if the car’s resale price exceeds the residual value of your lease contract.

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If you want the security of ownership but don’t want to have to return your car every few years, leasing might not be the best option. Use NerdWallet’s leasing calculator to determine if leasing is right for you.

AVOID CUSTOMIZATION

Although they may seem like a lot of fun, adding creative accessories such as noisy mufflers to race fans or black aftermarket wheels can actually decrease the car’s market value. The pool of potential buyers shrinks to those who share your preferences, and customization can make it more difficult for them to buy. Potential buyers may be concerned about the quality of modifications or whether they might indicate potential mechanical problems.

The color of your car can have an impact on its resale price. While flashy colors like reds, purples and yellows can make your car stand out and be more visible on the road, they are difficult to resell. Stick with more popular colors if you plan on selling or trading in them later.

MAINTAINING AND KEEPING RECORDS OF YOUR CAR

Regular servicing and maintaining all records will help prevent your car’s depreciation as fast as a poorly maintained vehicle of the same year and model. These two steps will help you rise to the top of your class when it comes time to sell. These steps show potential buyers that you are a responsible owner and increase your car’s resale price.

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SELLING PRIVATELY

You have two options when you want to sell your car. One is to trade it in to a dealer and the other is to sell it to a private buyer. You’ll get a lower price if you trade in your car. Dealers bear the cost of reconditioning, then selling it. There are steps you can take to maximize the value of your trade-in, but you’ll often get the best price by selling your car privately. This can reduce your depreciation by allowing you to spend more time and effort preparing your car for buyers.

Do you think it is worth buying a new car?

Despite that 20% to 30% drop in a car’s value in the first year, there are still reasons to consider buying new.

As opposed to buying used, it’s often easier to negotiate the initial purchase price, and new car loans tend to get the best rates. Plus, to get new models out the door, automakers may provide car-buying incentives that can significantly cut the sticker price. New cars come with warranties that make it easier and more affordable to maintain.

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You can drive your car until it’s totaled, so depreciation will not be an issue.