When it comes to vehicle financing, no one wants to end up with an upside down loan, the dreaded situation where you owe more on your car loan than the vehicle is worth. Savvy consumers will do their research and look for vehicles that best retain their value.
Generally, depreciation is based on market demand for a vehicle. Ferrari, for instance, is known for carefully selecting its buyers and then producing a limited number of its models to keep demand in the marketplace high. Popular extras will often help boost a car’s resale value while positive press (such as good safety ratings) and endorsements can also have an impact. Outside of these influences, there are a few overarching tips to consider so you can actually “get what you pay for.”
Figuring Out the Depreciation
Depreciation should never be overlooked. I explored the inclusion of depreciation in a total cost of ownership calculation in a comment on recent post about Buying New vs Used on Debt Free Adventure.
However, when it comes to vehicles, which cars tend to depreciate the quickest?
* New vs used
The saying is true, a new car depreciates the second it is driven off the lot. Generally, a new car depreciates the most in its first year losing about 20 percent of its value in those first 12 months. Thus, many buyers will purchase “near new” vehicles and last year’s models as they tend to have hit the brunt of their first year’s devaluation.
* Fuel Economy
These days, fuel economy is one of the most desired traits and many gas guzzlers will find the values of their cars plummeting faster than they can refill their thirsty tanks. Recently, diesel cars have been in higher demand for their fuel economy and small efficient vehicles have also retained much of their value.
* Bargain Basement Prices
Wonder why certain models seem like such a great value at the end of the year? Many dealers do their best to push through less popular stock at the end of the year to help clear out their inventory. If a model is nearing the end of its production line with many unsold vehicles still on the lots, chances are they’ll experience some falling price figures in the next year.
* Top Depreciating Cars
Meanwhile, Australia’s CarsGuide has released its list of fastest depreciating vehicles, with the Ford Falcon topping this list retaining just 47.9 percent of its value after two years. In the US, companies like Edmunds publish the depreciation information as well.
As noted above, large cars have been hit the hardest in the resale due to higher gas consumption. Meanwhile, the Honda Civic Hybrid performed the best when it comes to depreciation, losing just over 12 percent of its value after two years.
Do Your Homework
When making a car purchase, make sure to factor in the depreciation as part of the total cost of ownership. If I bought a car for $20,000 but could sell it in 5 years for $15,000, I essentially drove that car for $1,000/yr + gas, maintenance, repairs, and other miscellaneous costs. If the depreciation was more drastic and I could only sell the car for $5,000, it would have cost me $3,000/yr + gas, maintenance, repairs, and other costs.
Obviously, depreciation should be a large part of your decision if you don’t plan to drive the car until it falls apart.
I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.
December 21st, 2009 at 8:54 am |
There’s also the issue of commonality of parts. If you car’s part are interchangeable with those from several model years (or, even better, similar cars by the same manufacturer), it will retain more value simply because it’s cheaper to fix. If you think about it – if you were buying the car several years later, used, wouldn’t you prefer a car with parts that were easy to find? Also, when the car does bite the dust, the parts will have some value, since they can be used to repair other cars.
When we made our last car purchase, we bought a program car. It was a 2006 that we bought in April 2006 with 9500 miles on it. That was new enough for us :) Of course, did didn’t have much of a choice. We wanted a Taurus, and 2006’s were only available to fleet customers (as Ford had made the decision to kill the Taurus – a decision that they have since reversed.)
Kosmo @ The Casual Observer´s last blog ..A Crazy Plan
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MyLifeROI Reply:
December 22nd, 2009 at 4:08 am |
@Kosmo @ The Casual Observer,
Commonality of parts… I like how you put that. That’s probably another reason amongst many that Civics / Accords / Corollas / Camrys / etc hold value.
I didn’t realize Ford had decided to kill the Taurus. The new one is quite different. I saw it when I was getting my Focus. I think Ford has done a pretty good job revamping their image and their product line.
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Kosmo @ The Casual Observer Reply:
December 22nd, 2009 at 9:25 am |
@MyLifeROI, They planned to kill the Taurus and replace it with the 500. They kept the Taurus alive for fleets for a couple of years because of demand in that segment … during which time they realize that the 500 brand wasn’t a great seller.
Sadly, the new Taurus is much different (worse) than previous.
Kosmo @ The Casual Observer´s last blog ..What’s Next for Martin?
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December 21st, 2009 at 3:17 pm |
I still opt for the new car if you can manage it because it’s not something you should plan on replacing or selling anytime soon.
Craig´s last blog ..10 Ways to Prepare Financially If You Suspect You’ll Be Laid Off
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MyLifeROI Reply:
December 22nd, 2009 at 4:10 am |
@Craig,
Agreed. I stil run the numbers, though.
If a used car makes sense, I’ll go for it. If a new car makes sense, as it did in my recent purchase, then that’s what I’m going for!
I drove my last car 6 years before getting in an accident. I would have kept driving it otherwise. So I, like you, plan on keeping the car for a while.
[Reply]
Kosmo @ The Casual Observer Reply:
December 22nd, 2009 at 9:29 am |
@MyLifeROI, What I like about program cars is that you’er getting a very nearly new car, but some other sucker is paying a premium for those first 5-10K miles.
Six years? That’s barely broken in :) My current commuting car is a 98 Contour that my wife owned before meeting me. She was easy on the miles, so it still has barely 110,000 miles on it and runs well. A few repairs here and there, but still incredibly cheaper than buying a replacement.
Kosmo @ The Casual Observer´s last blog ..Apple In the Cloud
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