Save money on car depreciation

How to save money on car depreciation

Cars are terrible investments. In their most basic form, they are merely a tool to get us from A to B. In their most elaborate form they can be a “shiny” tool that gets us from A to B, but with more luxuries. But either way, they are not likely to be much of a financial benefit. Everyone has heard that a brand new car goes down hundreds or even thousands of dollars the minute you drive it off the dealer’s lot.

This is just the beginning. Over the first year some cars depreciate at a rate as high as 35%. KBB.com says that the average car loses 65% of its value in the first 5 years. Add on maintenance, repairs, interest on the loan, and insurance and you can quickly see that automobiles can have quite a large negative effect on our finances. We dump all this money into our cars and what do we have to show for it? An asset that just continues to go down in value and still becomes LESS reliable. So, if we are not likely to benefit financially from our cars, how can we minimize the damage?

Minimize depreciation loss by buying used cars

I have always heard (and I agree) that a two year old car is a good age to buy, because you are still getting a fairly new car that is likely to have some amount of manufacturer warranty remaining, but yet a huge chunk of depreciation is knocked off.

SafeCarGuide.com says, “A stabilized rate of depreciation (7% – 12% per year) makes used cars a better value than new ones. New vehicles lose an average of 20% of their value the instant they are driven away from the dealership. When coupled to the average yearly depreciation of 7% to 12%, your first year’s loss is anywhere from 25% to 35%. That translates to a first year $6,000 to $8,000 loss on a $22,500 new vehicle, or a $10,000 to $15,000 loss on a $40,000 one. And that’s for a vehicle only driven the average 13,500 miles. If you drive more than that, your depreciation will be greater (35% to 50% for the first year).”

For more information, Bankrate.com has a good article about the basics of depreciation and although I am not sure how accurate it is, you can also try this car depreciation calculator.

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A good way to find a reliable used cars is by checking Consumer reports. They are a Not-For-Profit organization that reviews thousands of products to help consumers get the most for their money. They have a very thorough and detailed list about the reliability of various different makes and model. Since they do no advertising (which helps them stay unbiased) they do charge for the service. They offer a one-month online subscription for $6.00 and a one year for $26.00. If you are in the market for a car, this would be a few bucks well spent.

If you buy a new car, plan on keeping it for a long time If you do buy new, plan on keeping it a long time. This is one of the best ways to get your money’s worth out of a new car. On the other hand buying a new car and trading in the “old” one every two years is one of the worst financial moves you can make. This seems to be what many Americans are doing these days as they try to keep up with the Joneses. As mentioned earlier, it is the first two years in the life of a car that are the most expensive. So why would you want to own the car only on the most expensive years?

One of the advantages of buying new is being able to break the car in properly and having the assurance that you know how the car was cared for all of its life. If you take care of your car and stay on top of your car maintenance, many cars these days can last 200,000 miles. I recently drove past a Toyota dealership that had an old Corolla that had been driven over 500,000 miles. I need to get hold of the owner and find out what he did to keep it running that long. I will let you know :)

Feel free to leave me some comments and let me know how you save money on your cars…

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31 Comments
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  1. Minimum Wage

    Buy from a car depreciation discounter or wait for a sale on depreciation!

  2. So, if a two-year-old car is the best age to buy a car at, when is the best time to sell? My husband and I have a 1998 Honda Accord and a 2000 Mustang and just had a large repair on each. That got us thinking about how long we should keep these cars. We will probably start a family in the next 2-3 years, so my car, the Mustang, will probably get traded in at that time. What about the Honda? We’ve heard varying recommendations, from “Sell it at the 10 year mark before it nickel and dimes you” to “Keep it till it dies”. Any thoughts?

  3. You know, I’ve been pondering something….do car dealerships offer display model discounts? Some big stores like Best Buy offer discounts off of their display models since they have been handled frequently by customers. Do dealerships offer a similar thing? Might be a good deal though. Just an idea.
    -Raymond

  4. @Becky
    You know I am going to be facing the same question shortly, my one car is almost 10 years old. But, I think I disagree with the advice of selling it at the 10 year mark – the main reason being that there is not a direct connection between 10 years and cars being worn out. Some cars nickel and dime you at the 5 year mark and some maybe not until the 15 year mark. We got rid of our last car when the transmission went out, everything working on the car it would have been worth about $2500, so at that point the $2000 estimate to replace the transmission was enough to say bye-bye. But without a major issue like that it is a tough decision – that probably can only be answered on a case-by-case basis.

  5. @Raymond

    Don’t know about that, but I do know that they sometimes have dealer cars with a few thousand miles on them for a discounted rate, that’s how my mother got her last car.

  6. Thanks for the post, Bob. I’ve said that I will be driving my car into the ground. It’s a ’95 Toyota Tercel that’s worth about $500 right now. My girlfriend says I should get a new one. What do you think, bro? :P

  7. @Tristan
    Well, I am into the idea of driving a car into the ground – as long as your aren’t getting nickel and dimed by repairs every month. But, if you think in terms of money saved by NOT having a car payment, you can afford some repairs – cause paying an average of $50 a month on repairs is obviously better than a $250 a month car payment.

    Bottom line, it is personal preference. If I were in your situation, I think I would keep driving it as long as the average monthly cost of repairs didn’t exceed what I expected my next car payment to be. Unless I was trying to impress a girl ;) – then I would probably sell everything I owned, take a $70,000 loan and buy a NEW BMW M5 ;) {kidding, for those who can’t tell}

  8. I’m still driving my 1989 Toyota Tercel….it’s been
    a great car but it’s time to part with it…too much
    rust on it now. Darn thing still drives great though.
    Bought it new and I guess you could say I got my $$$
    worth!

  9. @Amy
    Wow!! that is impressive!! You are right, that is the way to get your money’s worth out of a new car. That is what I want to do, I will let you know in 18 years if I made it!!

  10. Minimum Wage

    I just saved a bunch of money on car depreciation by buying a totaled car from GEICO!

  11. I usually take a two pronged approach..find a fast-depreciating car with a decent used-car rating from the Consumers Union. I’ve had good luck buying late model ‘American’ cars then diving them forever.

    My last purchase I got a 18 month old PT Cruiser ( ‘American’ sort of, made in Mexico) with 17K miles and paid around 50% of sticker price of new car. Very happy with the purchase.

  12. @Ernesto
    Great idea! my first thought is that there probably is a reason it is a fast depreciating car, but if you investigate it and find the best rated quick depreciating ones then it may work out well. If you can buy at 50% of the sticker at 1.5 years, that is impressive.

  13. My current car is a 10 Y/O Wrangler I bought for $8K, three years and 30K miles ago. I’ve consistently averaged $2K/year in repairs, so for the $14K invested, I could’ve almost bought a brand-new one instead.

    Luckily I’ll still get $4-6K out of it when I sell it, but I’m looking forward to a warranty and reduced gas costs when I get my new Scion xB. Having always owned trucks and vans, I can tell you, the way to save money on upkeep of a used truck is to buy a used car instead (if you can). I recommend the smallest station wagon or hatchback you can get away with. Here’s why:

    Staion wagons depreciate like crazy, because they “uncool”. Trucks’ weight and high center of gravity wears out suspension, brakes, tranny and engine much more quickly, and the parts are more expensive. Vans and minivans also tend to make design compromises that make them difficult and expensive to work on and buy replacement parts for. 4WD and AWD vehicles also have a whole bunch of other stuff that breaks. And uhh….duh, gas milage.

    The xB is still a truck (sort of) because I need the room to haul stuff, and my wife has the much smaller xA. Obviously, we’ll drive the smaller, cheaper, less-thirsty car when we can. Also, Scions have very low depreciation rates, should I decide not to drive it completely into the ground. Also, there’s nothing else that compares to an xB as far as fuel economy, price, room and stock features. And it seems like everyone’s ancient Tercels are still on the road; that’s a good sign!

    My $.02

  14. I think the key to understanding why observed car prices drop so quickly once they drive off the lot is a Nobel Prize winning economics paper from 1970 that every economics student knows, explained well here: http://www.slate.com/id/2140743/
    The key idea is that the observed “price” of a 1-year-old car is not some objective measure of its value but the average price of cars that are sold when they are one year old. And why would anyone sell their car after one year? Well, the suspicion might be that something about it is defective. So most cars that are sold after one year are defective, or sold at a price that takes into account the likelihood they could be.

    But if this is the correct explanation for the rapid initial depreciation, it doesn’t mean we shouldn’t buy new cars (because the rapid depreciation in observed prices doesn’t mean *my* new car is actually deteriorating in functionality at all). It only means we shouldn’t try to sell our new cars too soon, because the buyers will suspect our motives. So I can at least agree with the last section of the post.

  15. @Tim
    I know some people (everyone probably does) who buy a new car and sell it a year or two later, because they want the latest and greatest thing on the market. For them it has nothing to do with the proper working of the car.

    No doubt, there are some people who unload their lemons after a year or two. But I think there are many reasons why people would sell their cars after a year or two.

    And actually, my preference to older cars takes into account the “risk” of getting a lemon. I also like to use the statistical proof (Consumer Reports.org) that hondas and toyotas last longer with fewer problems than other cars.

  16. Tim Huegerich

    Fair enough, I agree with all your points. A couple things, just for fun:
    1) The people I know who buy a new car every couple years are not buying practical Hondas and Toyotas (which I also like) but fancy sports cars or other spectacles. For flashy cars, I would agree that the decrease in value is likely b/c they are no longer the latest thing. But for more ordinary cars, it may be harder to understand the rapid decrease in value.
    2) Even if just some of the people who sell their new cars after a short time are unloading lemons that already had a serious problem, that could dramatically lower the price because the sellers with good cars may not be able to distinguish themselves from the lemon sellers.
    3) I would expect that as you look at newer and newer cars, the proportion of total sellers who are unloading lemons increases. At least, when you talk about cars 1 month old or “just off the lot”, it’s harder and harder for me to imagine another reason for selling the car. And this could explain the steep drop off in resale prices after a new car leaves the lot.

    I guess my point is that as long as you keep your new car for the long run, the rapid initial depreciation doesn’t matter and really isn’t a reason to favor buying a used car. But it’s a good point that you shouldn’t sell a new car after only a short time.

    Disclaimer: I have never bought a car nor studied the automotive industry at all. This is more or less speculation (but you could probably already tell that).

  17. MrCrumbles

    Extraneous options can also increase depreciation value. People are willing to pay more money for a used car with desirable options like a moonroof, heated seats, awd, etc. But if you paid extra for a custom color, interior wood trim, or Recaro racing seats, few people will value those things more so they’ll want to pay the same price as the base car.

    My car is a wagon (Mazda3 hatchback) which I guess people don’t like. Personally I think it’s much sharper-looking than its sedan counterpart, but that’s me. I’m hoping that with everyone selling their SUV’s and downsizing that people will start to warm up to them. I mean come on, why wouldn’t you want triple the storage space in back?

  18. This is great advice. New cars look nice, but are not worth the loss you will face immediately after purchasing the car. I’ve always aimed for 2 to 3 year old cars with low miles. Much better deal.

  19. CharlesT

    In my sales job, I drive about 40,000 to 50,000 miles per year, so even if I buy a new car, it’s still shot in four to five years.
    Buying new for me would be foolish at the rate that I wear out vehicles.
    I haven’t bought a brand new car in 25 years, and doubt I will anytime soon.

  20. I completely disagree with the wisdom of buying a used car. Even my mechanic, who knew it would cost him business, suggested a new one. Even if a car is only 2 years old, you have no way of knowing if the oil has ever been changed and the muli point inspections the dealer talks about don’t mean anything. Do you think that they take apart the crank shaft and check the main bearings for wear? It’s ridiculous. Only with a new car do you know what you are paying for unless you know the person you buy the used car from.

  21. Rod Cadenhead

    Since college I have owned two vehicles. One was a 1986 Nissan truck I drove 13 years and the other is a 1999 GMC truck which I still use daily. Although I obviously keep vehicles as long as I can I will not buy another new vehicle. My goal is to only own one more vehicle in my lifetime. Cars are just way too expensive and can easily drain finances which can be put to better use than getting from point A to point B as mentioned in the article.

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