Advice

How To Beat Car Depreciation

By 09/11/2023 4:00pm

Car depreciation: Car, money, calculator

Quick Facts About Beating Car Depreciation

New vehicle prices give some car shoppers sticker shock, especially when they realize that the value of their new ride significantly drops the moment it’s driven off the dealer’s lot.

A vehicle’s loss in value over time is unavoidable. However, savvy buyers can save thousands when they purchase a nearly new model after the car’s initial steep depreciation and then sell or trade before the value significantly falls again a few years later.

Read on for tips on beating car depreciation and learn how it fits into the overall cost of car ownership.

What Is Car Depreciation?

Like other goods that become worn down through regular use, a car loses some of its value each year through the everyday wear and tear that comes with aging. This loss in value is known as depreciation.

The rate of car depreciation varies depending on the vehicle’s year, make, and model. The first year faces the most significant depreciation hit to the car’s market value, with most vehicles losing about 20% or more of their original value. The loss continues to decline from there. Cars often shed about 60% of their original purchase price within the first five years.

When the time comes to sell your car, you may find that depreciation has greatly reduced the expected trade-in value for what could still be a well-functioning automobile.

A car’s trade-in value is the amount of money an auto dealer is willing to deduct from the purchase price of a new or used automobile in trade for your existing vehicle. The trade-in amount is based on several criteria. Considerations include the make and model of the car, its age, and its condition at the time of the trade.

Other factors can affect a vehicle’s market value, too. For example, supply-chain disruptions can reduce new car inventory and increase the demand and prices for used vehicles. Also, rising gas prices might steer some potential buyers away from less-efficient models, and lower demand can influence a dealer to offer less for a full-size trade-in.

RELATED: Is Now the Time to Buy, Sell, or Trade a Used Car?

How To Use Depreciation to Your Advantage

Because of depreciation, the older your car is at the time of trade-in, the less credit toward a new purchase you’re likely to receive and the less money potential buyers are willing to pay in a private sale.

Holding onto your car for longer than average can sometimes be a benefit at trade-in time if the vehicle is in good condition. However, the rate of depreciation tends to slow after the odometer hits 100,000 miles. Of course, there are a few exceptions, with top-rated and desirable vehicles like some pickup trucks receiving higher trade-in deals.

Smart buyers looking for a good deal can make car depreciation work in their favor. Used cars are much lower in price than new cars because depreciation affects a vehicle regardless of its condition. You can purchase a 1-year-old car that’s nearly as good as when it was new, but pay only 80% or so of the original price.

Buying a used car from the current model year or the previous model year is the best strategy for shoppers wanting to beat car depreciation while still tapping into the remainder of the initial factory warranty. Choosing a vehicle from a manufacturer’s certified pre-owned program can be a good option. CPO cars have met strict inspection guidelines and other criteria to qualify for the designation.

RELATED: Car Warranty Guide: Everything You Need to Know

Car Depreciation Hacks

Car owners should understand depreciation to help manage the loss of value when they sell or trade their vehicles. To help keep resale value higher, sellers can consider these tips for minimizing car depreciation.

  • Maintain your car. Keeping records of regular maintenance shows responsible car ownership, which helps the value of the vehicle.
  • Sell the car yourself. Convenience is a benefit of trading in your car at the dealership. However, a private sale allows you to sell at market value and keep the costs the dealer builds into the price of the used car.
  • Don’t customize your car. Aftermarket customization shows off your style, but it also limits the number of potential buyers. Avoid flashy add-ons to keep your car attractive to the majority of used-car buyers.
  • Look for tax breaks. If you use your vehicle in your business or a side gig, check with your tax advisor about the possibility of deducting a portion of the car’s depreciation on your tax return.

RELATED: How to Sell a Car: 10 Steps for Success

The Cost of Owning a Car

Depreciation is one part of what it costs to own a vehicle. Along with the loss of value, you’ll have out-of-pocket expenses such as fuel, maintenance, repairs, and insurance. Knowing the overall cost of owning a vehicle ahead of time can help you save money in the long run.

Even if two new vehicles are priced the same, one can have a greater loss of value over time. Before buying a car, use our 5-Year Cost to Own tool to compare vehicles’ total cost of ownership, including a car depreciation calculator.

For example, a 2023 Subaru Legacy in the midsize car class has a 5-Year Cost to Own figure of $36,516, including $14,565 in depreciation. By comparison, a 2023 Toyota Camry Hybrid costs $1,163 more over five years, partly due to a greater depreciation of $15,713.

Why Car Depreciation Matters

The good thing about depreciation is that it only matters when you get rid of the car. Its value comes into play when you sell the automobile, trade it to offset the price of a different vehicle, or when your insurance company “totals” the car after a significant accident.

Until then, there isn’t much need to be concerned about how much your car is worth now compared to when you first bought it. The car will continue to depreciate until it is no longer usable. And even cars that aren’t drivable are worth something at the junkyard.

When buying a used car, it’s a good idea to consider the vehicle’s age and the number on its odometer. It’s even more important to look at how well the owner maintained the vehicle. A 10-year-old car with 100,000 miles may have received more TLC than a 5-year-old model with 50,000 miles.

While you cannot avoid it, you can fight off car depreciation by taking good care of your investment. Keep that in mind before it’s time to get rid of your ride.

Cars With the Least Depreciation

In addition to considerations such as MSRP, car loan interest rates, gas prices, maintenance costs, and more, an automaker’s reputation for reliability is a factor in vehicle depreciation. A company’s emphasis on quality often means that reliable cars roll off their assembly lines.

Vehicles with greater reliability typically retain more of their value and have lower depreciation rates and cost of ownership. Our projections using Kelley Blue Book data indicate that the two brands with the lowest 5-year cost to own are Toyota and Lexus.

For a list of the standout cars, trucks, and SUVs, take a look at the Kelley Blue Book 5-Year Cost to Own Award winners for 2023.

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Editor’s Note: This article has been updated with new information since it was originally published.