Car depreciation probably isn’t the first thing that you think about when purchasing a car. In fact, it usually isn’t a concern until it's time to sell your vehicle. However, even if you are not in the market to sell your car right now, it's a good idea to know what it means in the event that you do sell.
So what exactly is car depreciation?
In simple terms, depreciation is the reduction in the value of an asset over time. Cars, specifically, are known for their significant depreciation the moment they are driven off the lot. On average, a car will depreciate more than 20% within the first year of ownership.
Although the full impact of your car’s depreciation isn’t realized until you sell it or trade it in, it should be front of mind during your purchase. Yes, a car is an asset, but it is a depreciating asset.
Knowing more about car depreciation and how you can reduce it will allow you to make a more informed buying decision.
What impacts car depreciation?
A car’s depreciation is determined by several factors. This includes its make and model, mileage, and overall condition. Here’s what you should know about these factors.
A car’s condition takes into account it’s upkeep and general appearance. This includes wear and tear of mechanical parts, the interior, and any exterior damage to the vehicle.
A vehicle’s condition can be categorized as poor, fair, good, very good, or excellent. Here's how these conditions are graded:
- Poor: Severe mechanical problems and cosmetic defects; it typically cannot be fixed.
- Fair: Requires repair and has cosmetic defects
- Good: No mechanical issues with minor, repairable cosmetic defects
- Very Good: Excellent mechanical condition with minor cosmetic defects
- Excellent: Practically like new
Ultimately, a car that is well taken care of can avoid losing some of its value.
Mileage in and of itself does not cause a car to depreciate. Instead, it is the wear and tear that constant driving and usage that makes it lose its value.
Each time you drive, the mechanical parts of your car degrade. They become worn down and, as a result, slowly worsen the condition of your car.
The reduction in value from usage is the reason that used cars are far less expensive than a new vehicle.
Make and model
A vehicle’s make and model also has a significant impact on its depreciation. This is because some brands make generally more reliable vehicles.
If a specific make and model is known for its quality and durability, it will hold its value much better than a vehicle that is known to break down quickly.
Cars that hold their value
This list of vehicles ranks the top 10 cars that hold their value over time. They are:
- Toyota Tacoma
- Ram 1500
- Ford Ranger
- Chevrolet Silverado 1500
- GMC Sierra 1500
- Chevrolet Corvette
- Toyota 4Runner
- Jeep Wrangler
- Toyota Tundra
- Jeep Gladiator
You may quickly notice a trend among these vehicles. Most are trucks and none are considered luxury. This is because cars, more specifically luxury cars, depreciate at a much higher rate.
According to a 2019 study, luxury cars such as BMW, Mercedes, and Jaguar were among the top 10 car brands with the highest depreciation.
Leveraging a car depreciation calculator
Depreciation can seem a little tricky to calculate. After all, there are so many factors that come into play. Ultimately, you want to calculate the difference between what you paid and the car’s current fair market value.
The good thing is that you don’t have to worry yourself with the math. There are car depreciation calculators available that can help you determine your vehicle’s value.
You can use this car depreciation calculator to see how much you will lose in value after the first year and over the time that you own your car.
Key tips to minimize car depreciation
Though depreciation is inevitable, there are things you can do to minimize how much your car depreciates. Here are some tips to help you maintain your car’s value.
Invest in cars that hold their value
The best way to minimize depreciation is to buy smart. This means purchasing cars that hold their value. You can start by considering the top 10 vehicles listed by Kelley Blue Book.
If none of them appeal to you, you can always research the resale value of the vehicle that you’re interested in to determine if it is worth the purchase.
When you’re trying to decide what car you should buy, consider used vehicles as an option. A used vehicle has already lost some of its value, so you reap the benefits of a reduced price. Buying used makes car-buying more affordable.
According to Lending Tree, the average monthly car payment for a new car is $550 versus $393 for a used one. The difference that you save can be put toward other things in your budget—including paying off debt or saving.
Lease your vehicle
If you want to avoid depreciation altogether, you may choose to lease a car instead of owning it. Leasing is essentially renting a car for a certain amount of miles and time period.
This mode of transportation does come with stipulations. So before you sign the dotted line, review your options to determine if you should lease or buy a car.
Keep up with scheduled maintenance
Since a car’s condition is one of the primary factors for determining its value, taking care of your vehicle is of uppermost importance. This means that you should plan for scheduled maintenance for your car.
You’ll want to include oil changes, tire rotations & replacements, and tune-ups within your budget. Creating a car sinking fund is a great way to save up for these expenses.
Also, be sure to keep a record of your car’s maintenance as a part of your vehicle’s important documents.
Extensive traveling can increase and accelerate the wear and tear of your automobile. To reduce this, consider integrating carpooling, public transportation, or walking as a part of your weekly routine.
These small reductions in usage can make a significant difference in the life and value of your car.
Other things to consider when purchasing a car
As you can see, there’s much more to buying a car than what meets the eye. Fuel economy, safety, and price are all important factors when purchasing a car, but so is depreciation. It’s also important to remember that a car is an ongoing expense. So, consider these tips to save on car expenses.
As always, Clever Girl Finance has free resources available to help you financially prepare for this step in your journey. Be sure to check them out!