Avoiding High Rates of Depreciation

Tactics to slow down a car’s depreciation in value

While it seems like an odd concept, the second you drive a new car off the dealer’s lot it’s worth substantially less than what you paid for it only moments earlier. This happens because several factors, including depreciation, affect a car’s long-term value. Fortunately, there are some tactics owners can take to help maintain their investment in a car.

This isn’t an easy topic to tackle, because unless you happened to pick up the first Ford Mustang that rolled off the assembly line back in April 1964, there is a good chance the next car you purchase will be worth significantly less in just one year’s time. It’ somewhat of a good news / bad news story because no matter how hard you try to maintain its value, in the end your car will still be worth less over time.

Factors affecting a car’s value

There are around five overarching factors that influence a car’s trade-in value or the price a buyer is willing to pay for a used car:

  • Popularity: buyer demand for certain makes and models of cars will be higher than others
  • Brand Reputation: some manufacturers are better at producing quality vehicles. Cheaply made passenger cars, SUVs and trucks will experience more repairs over time and will be worth less in a buyer’s eye
  • Maintenance: vehicles that are not well maintained by their owners will show visible signs of neglect
  • Mileage: all cars are subject to mechanical wear; even the most well-maintained cars will lose value as the mileage on the car increases

All the above factors result in the depreciation of a car’s value. For this reason, even estimates by the best car depreciation calculator cannot account for all of these factors.

A little about depreciation first

While the term deprecation is more common in the accounting world, it simply means a decline or reduction in value – normally referring to a physical asset. Calculators that attempt to model depreciation can only do so using simple rules. For example, statistically we know the average new car declines in value by around 20% in just one year. After the first year, a car’s value declines by around 15% per year.

Now all these deprecation models, including ours, are informative because buyers can get a fairly accurate estimate of the decline in their car’s value over time. But these models are based on statistics gathered in the used car marketplace. And an average rate is just that – an average – which means some cars will be better than average and some worse. Fortunately, there are some tactics an owner can take to beat these statistics and help their cars maintain their value.

Maintenance inside and out

While the lubricants we use to maintain our cars may not look the part, there is a lot of chemistry that goes into the development of these oils and various other fluids needed to keep a car running smoothly. Advances in viscosities and synthetic engine oil allow us to drive more miles between changes too. Following a manufacturer’s guidance on maintaining a vehicle is easy to do – just crack open the owner’s manual and have a peek inside. And while some of the milestone recommendations might be expensive, they’ll pay benefits later on when selling the car, especially if you keep good records too.

Maintaining a car’s exterior and interior cabin are just as important as the mechanical components since any mistreatment will be obvious to a buyer. Let’s face it, an owner that never washes their car or drives around in a dirty interior is likely neglecting the car’s engine and transmission too. Vacuuming the interior and washing the exterior not only add to its long-term value, but you’ll also feel a sense of pride when your ride is looking good too. If you’ve ignored the exterior and interior for years, find a local car detailer and have them clean up the car before you try to sell it or trade it in.

Buy a used car

The popularity of leasing cars has led to a surplus of gently used vehicles, many of which might even be sold as certified pre-owned vehicles – which means they’ve undergone rigorous inspections and come with extended warranties. Statistically, a car loses most of its value in the two years of ownership so these vehicles can represent an excellent value.

The US News and World Report recently released a list of the ten cars with the highest five-year depreciation rates, including the BMW X3 (66.5%), Lincoln MKZ (67.1%), Mercedes-Benz S-Class (67.1%), Volvo S60 (67.8%), Mercedes-Benz E-Class (69.0%), Maserati Ghibli (69.0%), Audi A6 (69.0%), Nissan Leaf (70.1%), BMW 5 Series (70.1%), and BMW 7 Series (72.6%). While this is horrible news for owners of these vehicles, it represents an opportunity for frugal buyers willing to purchase a used car.

Quality counts – a lot

If you’re not interested in buying a used car, then buy a car from a manufacturer known for producing high-quality vehicles. That being said, don’t confuse quality with luxury. You may have noticed that every car on the high depreciation rate list is a luxury vehicle. Toyota, Honda, Subaru and Mazda all make high quality vehicles and therefore should experience lower than average depreciation rates.

Quality vehicles will also be less expensive to operate in the long run, which means fewer unexpected mechanical repairs. This brings us to our final point on slowing down depreciation. While the average might be 15% after the first year of ownership, the rate of depreciation actually slows down over time. For example, the rate of depreciation might be a little higher than 15% in year two, but in year four it might be slightly lower than 15%. This is why we place a limit on our calculator. After seven years or so, the accuracy of the calculator will decline significantly since the rate of depreciation may be closer to 10% by the seventh year. This is just another reason why used cars represent such a good value to a buyer when they purchase the vehicle AND when they sell it.

If you are thinking about buying a car or you’re just curious, take a look at our new or used card depreciation calculator and run through some scenarios to see how depreciation affects the value of a vehicle. Keep in mind these are estimates and your actual mileage may vary.

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