4 Important Things You Must Know About Car Depreciation And How To Save Thousands Of Dollars

4 Important Things You Must Know About Car Depreciation And How To Save Thousands Of Dollars
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Car Depreciation

We buy stuff, literately from a pound of potatoes for the dinner tonight to million-dollar house that you dream.  It’s our nature and some are necessary.  The Car depreciation is one of prominent example of loss by depreciation.

 

1. The Car Depreciation takes place fast

For instance, MSRP for 2015 Mercedes C-class C 300 4MATIC, is $40,400 [1].  The market value as of May 2018 is  $25,608 [1].  It is $14,792 of pure loss by depreciation.  Additionally, the overall inflation between January 2015 and January 2018 is approximately 6.06% [2] according to U.S. Bureau of Labor Statistics.   MSRP $40,400 in 2015 is worth $42,848 in 2018.  Therefore, the net loss is $17,240 in 2018 US dollars just in 3 years!  If you take out the loan to buy this car, another $1,000 to $3,000 of interest is added depending on the interest rate and loan term.  This unconscious loss is a significant just in 3 years but ubiquities in the today’s market.  The dealer might slash few thousand dollar off closer to the invoice price of $37,572 but it’s still stark difference between prices at new and 3 years later.

This is a generic example of depreciation of the car and it follows similar trend for other models.  The following table shows the depreciation of selected vehicles between 2015 and 2018.  The vast majority of consumers are swayed by the marketing and it won’t tell you how much the car will be depreciated per year in this short period of time.  Instead they push and lure consumers by saying “savings”.  They’ll tell you how much you’re going to save by buying a new car.  Almost always they are not going to mention how fast car depreciation will take place.

 

2. Look into the value of vehicle to mitigate the loss

The solution to car depreciation is to look for the value of the vehicle.  Unlike real estate, the value of vehicle drops as the time goes by unless it’s vintage one.  The depreciation of new vehicle takes place most in first 3 to 5 years.  The smart way to look for is to find the compact used vehicle.  Never buy luxury brand, and never take out the loan.  If you want cost effective yet reliable and still look like new car, look for 3 to 5 year old used vehicle, which just underwent through the steepest depreciation curve.

Depreciation of vehicles 2015 – 2018 [1], [2]

2015 Model Year VehiclesMSRP in 2015 $MSRP Inflation Adjusted In 2018 $Invoice In 2015 $Market Value In 2018Depreciation From MSRP (in 2018 $)Market Value % Of MSRP (2018 $)
Mercedes-Benz C 300 4MATIC40,40042,84837,57225,60817,24059.80%
BMW 528i Sedan RWD49,95052,97646,45526,07826,89849.20%
Lexus ES 350 FWD37,70039,98435,31425,70414,28064.30%
Honda Civic LX18,49019,61017,19313,8155,79570.40%
Toyota Corolla LE18,56519,69017,18913,3366,35467.70%
Nissan Sentra SV18,35019,46217,31111,9777,48561.50%

As you can see above chart, the depreciation of luxury models is significantly higher than that of compact sedans.  You are losing at least $10,000 or more without doing anything else.  Not to mention, gas mileage is going to be much worse due to heavier vehicle weight and larger engine size.  The replacement parts are going to be more expensive too.

 

3. The Value of vehicle configuration

Another aspect is that the vehicles may share their platform with another, meaning the automakers may use the same chassis for different models.  They put different body on the same chassis to save development and manufacturing cost and sell it at different price range.

This is not particularly unique practice, especially engines and transmissions.  It is merely counterproductive for automakers to design and manufacture unique engine and transmission for every model.  The consumers should take this fact into account to be a smart shopper because you may want to be aware of what you are really spending for.  The vehicle that you plan to buy may use same engine and transmission from less expensive model, then you are spending more on something else, for instance, interior, extra options, GPS, sunroof and so on.

 

4. Be Objective

The purpose of vehicle is to transport the passenger from one location to another. Typical person spend 17,600 minutes per year in the car according to AAA [3].  It’s only 3.35% of the day and it’s not worth of spending your precious tens of thousands of dollars on something that will disappear in few years.  If you have $10,000, there are so many ways to invest and increase your asset.  No need to be ostentatious, you are worth so much more than the car.  You have your own goal to achieve.  Stand by your objectivity.  Don’t let car depreciation drain your asset.  Buying cost effective used car also saves carbon footprint.

 


 

Reference

1.   Car Guru Price Analysis
*Market values are as of May 2018

2.   CPI Inflation Calculator
**Overall inflation rate between Jan 2015 – Jan 2018 = 6.06%

3.   Americans Spend an Average of 17,600 Minutes Driving Each Year, AAA

 

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