The Factors That Impact Car Depreciation; and Why Buying Used Helps Avoid It

October 22nd, 2016 by

In 2016, consumers are looking for used cars for sale in Albany more than ever. With the new car market coming out of a successful boom in 2015, this might surprise you. But, with the average price of a new car now hovering around $30,000, it’s easy to see why used car sales are quickly closing the gap. Another factor is depreciation, which is equivalent to pouring salt in an open wound when it comes to buying a new car. Many of you know that depreciation translates to the value a vehicle loses over the course of its lifetime. As soon as you buy a new car, it loses value when the wheels leave the dealership parking lot. Then, it continues to lose value until it’s (theoretically) worth $0 on paper.

Although it’s slightly more complex than that, and there are additional factors that determine the depreciation of a vehicle, you should still learn about how buying used (mostly) avoids depreciation altogether.

 

Depreciation Factors

Some models depreciate more than others, and some depreciate less. As a general rule of thumb though, a car will depreciate between 15-to-25 percent each year for the first five years of its life. At the end of that time, you’re left with a vehicle that’s only worth about one-third of what you paid for it. Depressing, isn’t it? But, what are the factors that impact vehicle depreciation?

Mileage

This one is quite obvious — the more a vehicle is driven, the more it depreciates. Just like the fewer miles, a vehicle racks up, the less it depreciates. 15,000 miles a year is the industry standard, so if you drive more than that yearly for five-plus years, your vehicle will be worth barely anything by the end of that time.

Which is why leasing is a good idea as well. Having those yearly limits on how many miles you can drive — then being able to trade the vehicle in for a new one with no strings attached — allows new car-buyers to skip depreciation. The downside of this, of course, is that you don’t own the vehicle.

Fuel Prices

It’s amazing how fuel prices seem to claw their way into every little thing in our automotive lives, isn’t it?

When we were paying $4 a gallon a couple years back, the hybrids and other smaller fuel-efficient vehicles were depreciating less than less-efficient vehicles like trucks, full-size sedans, and SUVs. Why? Simply because at $4 a gallon, those fuel-efficient models were in such high demand.

Now that gas prices have “stabilized” at an “affordable” rate again, the shoe is on the other foot. Small cars are now depreciating because they are in less demand, and larger vehicles are starting to see the light of day again.

News Headlines

Believe it or not, headlines and press coverage can drastically impact vehicle depreciation. The VW “Dieselgate” scandal  — when VW tampered with fuel economy and emissions on their cars back in 2015 — has had a negative impact on not only the brand but diesel cars in general. Because of the residual effects, diesel vehicles as a whole in 2016 are suffering from higher depreciation rates.

In theory, the same can be said about positive press coverage. If a brand does something amazing to their sedan and it’s covered by the news, more consumers will swap over to buying that brand. Since it’s in such high demand, sedans will depreciate less.

Luxury Branding

Is this really surprising? Mercedes-Benz, Lexus, Audi, and Infinity models are all covered by a blanket (and rather snobby sounding) category labeled “prestige luxury car.” Typically, they’ll hold their value better than non-prestige models. But, it varies within the category itself.

Even so, depreciating by 25% in the first year is a lot less detrimental on a $25,000 non-prestige sedan than it is on a $100,000 prestige luxury vehicle.

Optional Features

Again, thanks to value and demand, vehicles that are fully-loaded with options will depreciate much quicker than versions that aren’t as loaded. This means eventually, a near-loaded vehicle will be worth around the same price as a non-loaded vehicle. Amazing how that works, isn’t it?

The features impact it, too, and things like a power sunroof, leather, oversized chrome wheels, heated/cooled seats, rear entertainment systems, touring/sport packages, and turbo/supercharged engines all cause the vehicle to depreciate the most.

Tax Deductions for Business

On a more positive note, the IRS sets limits on the amount a vehicle can depreciate that’s being used for a business. The first year limit is $11,160, with an additional $300 reserved for trucks and vans, along with any “bonus depreciation” that might pop up for various reasons.

With all these factors, it’s no wonder new car-buying can be such a nightmare. If only there was some way to avoid dealing with this…

 

Buying Used (Mostly) Avoids Dealing with Depreciation

Oh, wait — there is! It’s called used car-buying. How is this possible? Simple, by looking at the factors above that are a soul-crushing reality for new car buyers, and using those to your advantage.

The more a vehicle is driven, the quicker it depreciates? Find a car with medium-high miles that’s been properly maintained and known for its reliability, and laugh at how much you’ll save compared to the regular price.

Want that luxury dream car you’ve always considered, but never dared purchase? Buy a top-notch used Mercedes-Benz model that’s five-plus years old, and save over half on the original $100,000 price tag.

Optional features come into play? Sweet! Grab that fully-loaded version for the same used price as a base trim. Is fuel economy going back up? Grab a fuel-focused hybrid for a really good deal.

Did something negative just happen on the news with your favorite type of car? Good news for you, buy a similar model from your favorite brand.

It’s all about being observant with the car market, and turning the disadvantages that new car buyers face into advantages.

Keep in mind though, buying used doesn’t entirely avoid depreciation. Regardless of what type of vehicle you buy, it will keep depreciating until its paper value is zero. Find the sweet spot by buying a used car that’s five-plus model years old and in good condition, and you’ll experience all sorts of savings compared to what it costs new. You’ll also avoid dealing with that major loss in value that happens in the first five years of ownership.