The world of cars would be entirely different if it weren’t for depreciation. It certainly has proved to be one of the most stable factors of the entire industry for many, many decades: Technological innovations have come and gone, the durability of most cars has improved significantly and various brands have made their entry and disappeared. But despite the positive changes to the quality of most models, depreciation continues to take its toll.
Are you considering buying or selling a car? Then deprecation will need to factor into your decisions. In this guide, we intend to explain the ins and outs of depreciation. In doing so, we’ll provide you with all the information you will need to protect yourself against its harmful effects.
In the end, you may even be able to make it work to your advantage! After all, according to an insightful study, more than 10% of all car buyers are not even aware of the fact that different cars can have strikingly different depreciation rates. By informing yourself on the topic, you can stay one step ahead of them.
Depreciation: The biggest loser
As mentioned, depreciation has been a constant on the car scene. As website car fox puts it:
“The fact that new cars lose 20 percent of their value the first year has been fairly constant over time. Your father could bank on it, and so can your daughter when she buys her first car.”
This may be the reason why so many potential buyers and sellers simply take depreciation for granted. That, however, can turn out to be a costly mistake. After all, depreciation is the most incisive influence on the cost of a car by a long run.
According to Moneysupermarket, depreciation …
“… is the single biggest factor in the cost of owning a car. It even outweighs the combined cost of fuel, servicing, taxing and insuring the car – all things generally considered when choosing a new car.”
This means that you can save a considerable amount of money by following a sensible depreciation strategy.
How do you do that? Glad you asked!
When depreciation matters – and when it doesn’t
Before you even begin your research, you should first be clear about what your goals are.
These goals matter, because although depreciation will always be relevant, it matters more or less depending on your preferences as a driver.
Simply put, depreciation matters most if you intend to buy a new car and to sell it again pretty quickly. The effect of depreciation is felt strongest with new models, and it also tends to be highest in the first three years of use. After that, rates gradually level out and become less problematic, until they eventually plateau.
Vice versa, depreciation matters less, if you intend to intend to buy or sell a really old car. Typically, many experts consider the tenth birthday of a vehicle the point of no return. Beyond it, depreciation no longer matters. By buying a new car and then using it until it falls apart – literally or figuratively – you won’t be affected by depreciation at all, since you’re not selling it anymore (unless there is still some money to be made by offering it to a scrapyard).
For most buyers and sellers, the truth will lie somewhere in between. Which means that the first and perhaps most important step consists in informing yourself.
To get the process started, let’s begin with a seemingly entirely irrelevant question:
Where do you live?
On closer inspection, what appears to be an absurd question makes complete sense. Depreciation, after all, may have been around for as long as there are cars. But its effects have been cyclical, oscillating wildly depending on current socioeconomical conditions. So you will need to adapt your strategy accordingly.
One thing you need to take into consideration is that different countries can have astoundingly different depreciation rates for the exact same model. Cars lose a lot more money in New Zealand, for example, than they do in the UK. According to kiwi website stuff. co.nz, “cars with an average odometer reading of 56,000km – or 14,000km per year – will have depreciated by 53.67 per cent on their recommended retail prices the year they were sold.”
On the other hand, used cars are exceedingly expensive in China, where depreciation is all but non existent. So, when taking depreciation into account, you will first need to investigate the rate deemed acceptable in the country you live in.
The Cycle of Life
What’s more, the price of petrol can have a clear effect on the depreciation rate of certain types of cars. Why is this?
Very simply, the higher the price of petrol, the more interesting smaller, fuel-efficient cars become. And the cheaper the petrol, the more people will feel drawn to big SUVs and four wheel drives.
Interestingly, even the state of the economy can influence depreciation. When the recession reared its ugly head around 10 years ago, this instantly sent depreciation soaring. This is because economically troubled times will reduce the demand for expensive items such as cars, irrespective of whether they’re new or old. So the best time to buy a car would be at precisely such a moment – while the best strategy when selling would be to wait things out a bit.
Are you buying or selling?
This is an essential consideration, because it decides whether depreciation constitutes a benefit or a problem for you. As a seller, depreciation is obviously problematic, because it reduces the value of your vehicle. On the other hand, as a buyer, depreciation can make your purchase a lot more attractive.
This is common sense. However, as times have changed, markets have transformed from being mainly a buyer’s market to being a seller’s market. This can and should influence your decision on when or how to sell your car.
Fortunately, there is a very easy rule to help you:
The more used cars are available, the higher depreciation. And the higher the demand for used cars (and thus, the lower the demand for new cars), the lower depreciation.
As the market has changed from being predominantly focused on new cars to a strong preference towards second hand vehicles, it has become more lucrative than ever to sell your used car, as described by newspaper Irish Independent. For buyers, meanwhile, it has meant having to spend a few Pounds more on a used car than before.
Speaking of which …
Finding the right model
If you intend to re-sell your car at some point in time, it can actually be more sensible to buy a slightly more expensive car than to hunt for bargains at all cost. This is because brands tend to have remarkably differing depreciation rates.
While it may be true, that Japanese, Korean and German brands still have a slight edge over others, this no longer applies to each and every car out there. As our tastes have diversified, so has our demand for vehicles from all corners of the world. Prices for used cars reflect this.
Generally speaking, luxury cars (including expensive sports cars) hold their value best over time. For one, waiting times for a new luxury car tend to be extremely long (as some of these are manufactured on demand). And obviously, more expensive cars are associated with a higher quality and, thus, a lower loss of value over time.
Which explains why, when autocar approach the topic of depreciation, its top 10 of the least depreciating cars included the Porsche Macan and the Range Rover, the Mercedes GLA and the Audi A1, with the Ferrari 458 coming out on top. Although this list is undeniably interesting, it is hardly useful for 99% of car buyers, however.
Rival car magazine Autocar offers a far more practical list. Eliminating the aforementioned luxury items from its selection, it identified the Mini as the car which lost the least over time, with Audis, Volkswagens and Lexus following closely behind.
Especially as a buyer, you should know these lists by heart. When comparing two cars you’re potentially interested in, you should look at their mileage or at their value after a certain time of use. This is called its residual value. If one of the cars you’re potentially interested in has a considerably higher residual value than another, comparable model, you should definitely factor this into its purchase costs.
In some cases, it can even save you money to buy an initially more expensive car, if its residual value is considerably higher than that of others.
Developing your depreciation strategy
With all of this in mind, it is now time to develop your personal depreciation strategy.
Here are the six best steps you can take to protect yourself from the averse effects of depreciation.
- As a buyer, look for brands that depreciate quickly, despite offering excellent quality. Ford, for example, is one of the car makers that offers great value for money in this respect.
- Either buy a one-year old car or a really old one. In the first instance, you are avoiding the extremely high depreciation within the first 12 months of driving a car, while still getting all the benefits from a practically new model. In the second case, you’re buying at a point where depreciation has bottomed out.
- As a seller, it can make sense to keep your car for as long as possible. If you don’t re-sell your car at all, depreciation is zero.
- Always calculate the residual value of a car before comparing its price to others. The residual value tells you more about how expensive a car really is than the nominal purchase price.
- According to the AA, it makes sense to only select those additional extras and accessories that add to the value of the car and to avoid the kind of modifications that make you look like a reckless driver.
- Before selling, make sure to have your car repaired and serviced if necessary. Taking care of your car will automatically translate to a better resale price.
Then again, things may not just be about money …
A different perspective
In a really interesting article intriguingly entitled “Why New Car Depreciation Isn’t as Bad as They Say”, Andrew Tai has given everyone worrying about depreciation some food for thought. Too many buyers and sellers treat a car like an investment, Tai argues. According to his logic, this doesn’t make sense. No matter which brand you prefer and regardless of how well you treat it, a car will always lose value over time, far more than any stocks, expensive paintings or any other traditional investment option.
On the other hand, it is also a lot more fun.
This, Tai claims, means that you need to look at things from a different perspective:
“When you purchase a new 80-inch television, the thought of how much it will be worth in a few short years is a small concern, because ultimately it will be worth less than the price you pay for it. After all, it’s only a consumer good that you’ll likely use strictly for pleasure, either by catching the latest football game or watching a shiver-inducing thriller. The same attitude should be applied when purchasing a new car. Investing in a new car is more similar to investing in an education, new wardrobe or even time. These investments are made with hopes of adding value and perhaps capital to your life, but they are not made with the same promise that an investment in stocks or real estate provides.“
This is not to say that depreciation doesn’t matter. It merely means that perhaps you should not allow it to spoil the fun of buying, selling and, most of all, driving a car. In the end, maybe this simply piece of advice is actually your best bet to protect you from the adverse effects of depreciation.