When people buy homes, they purchase them with the expectation that the value will rise over time, building equity. This is not the case with cars. These expensive purchases lose value over time, and the rate of loss varies according to the car’s age, make and model.
You may not realize this, but automobile depreciation is actually the single most expensive cost of owning a new car. Even cars that are well maintained and kept in pristine condition decrease in value over time. When you purchase a new car, you are spending a lot of hard-earned money on it, so it's a good idea to consult a car depreciation calculator to get an idea of your car’s projected worth.
Is It True that New Cars Depreciate Faster than Older Cars?
Yes. The newer the car, the faster its rate of depreciation. Are you wondering, "What will my car be worth?" Consider this: The moment you drive your new car off the lot, it will depreciate by as much as 11 percent of its value.
Let that sink in a moment.
That means that if you purchase a $20,000 vehicle, it will lose as much as $2,200 in value just by the simple act of your driving it home.
Fortunately, depreciation does not continue at this rate, but it is still faster for new cars than for old ones. On average, a new car will lose as much as 19 percent of its value in its first year of ownership. That means that your $20,000 new car will be worth about $16,200 after just one year. With each successive year, the rate of depreciation decreases significantly.
Check out the car depreciation chart to see how a new car may decrease in value over the first five years.
Are Car Depreciation Calculators Accurate?
You may be wondering how much your particular vehicle has depreciated. There are several car depreciation calculators available online. These will enable you to view projected depreciation values based on the purchase price of your vehicle. However, most are based on average depreciation rates and do not take the actual vehicle into consideration.
If you are interested in finding out about the depreciated value of a specific car, look for a car depreciation schedule that bases its calculations on the make, model and year of your car. For the best one we have found, go here.
Of course, these depreciation calculators are not 100 percent accurate, as they cannot predict the state of the market and they do not factor in the condition of your car. If your vehicle has been in a major accident or has significant rust problems, its value will be even lower.
What Causes Some Cars To Depreciate Faster than Others?
In general, popular cars are easier to sell as used vehicles. In this case, depreciation rates will be slower than cars that are difficult to sell. Some vehicles just never seem to catch on, though they may be great cars with fantastic features. A fast depreciation rate does not necessarily reflect on the reliability or performance of the car.
Other factors can affect depreciation. For example, the recent spike in gas prices caused depreciation rates on gas guzzlers to increase at an alarming rate. Some of the hardest hit vehicles were SUVs and Hummers. As a result, crossovers, with their better gas mileage, have been gaining in popularity over the past few years.
According to bankrate.com, these are the five cars with the fastest depreciation rates:
- 2012 Kia Sedona LX:
- MSRP: $24,900
- Expected depreciation in first five years: $17,730
- 2013 Chevrolet Impala LT:
- MSRP: $27,385
- Expected depreciation in first five years: $17,983
- 2012 Jeep Liberty Limited Sport 2WD:
- MSRP: $23,395
- Expected depreciation in first five years: $15,239
- 2012 Suzuki Grand Vitara Premium RWD:
- MSRP: $22,349
- Expected depreciation in first five years: $14,379
- 2013 Jaguar XJ AWD:
- MSRP: $76,700
- Expected depreciation in first five years: $52,014
You can expect the cars listed above to lose well over half their purchase price in the first five years of ownership. This is not to say that these are bad cars. They may be excellent vehicles for the people who bought them. If their owners keep these cars for at least 10 years without trading them on another vehicle, they will likely even out with other cars that have better depreciation rates.
By comparison, bankrate.com also lists the cars with the lowest depreciation rates.
Why Do Depreciation Rates Matter to Me?
You should factor in depreciation rates when you are calculating the actual cost of owning your new car. Also, it is extremely important that you understand how your car depreciates so that you can take steps to avoid potential problems. The main reason that depreciation can cause significant financial hardship for vehicle owners is the reality of upside down loans.
During the 3 three years of ownership, your new car is likely to depreciate at a faster rate than your car payments are able to reduce the principle. If you bought a $30,000 vehicle, it is likely to lose approximately $7,400 in value in the first year alone. If you put $1,400 down when you bought the vehicle, you will still have had to pay $500 in principal alone to keep up with the depreciation. If you financed with a 5-year loan or longer, you will not have met this burden. This means that at the end of the first year, you will own more for your vehicle than it is worth.
This is all well and good if you plan to keep your vehicle for a long time, but if you plan to trade in on a new vehicle every two or three years, you should be aware that doing so could cause you a significant financial loss. In this case, you would probably be better off purchasing your vehicle on a lease instead of outright.
Are there Ways to Limit the Total Depreciation?
You can save a significant amount of money in depreciation costs by taking one of the following two steps:
- Buy used cars: When you buy a pre-owned vehicle, you will save a significant amount of money on depreciation because the previous owner will have paid a significant portion of the car’s total depreciation. If you buy a relatively new 3-year-old vehicle, the previous owner will have already paid off nearly half of the car’s total possible depreciation. More so if the vehicle is 5 years old or older.
- Keep your new car for as long as possible: If you prefer to purchase new cars, you can still limit your depreciation losses by holding on to your vehicle for as long as it runs. By the time a car is 10 years old, its depreciation rate is negligible.
No matter the age of your car, insurance will be a concern. Rates will almost always be lower for used cars than new cars, but regardless, keeping coverage costs low is a good savings strategy. The best way to do that is to keep your car insurance search as efficient as possible. Independent agents can make that search short and to the point by getting multiple quotes from several insurance companies that you can compare before you buy. Trusted Choice® agents can give you a leg up, no matter the depreciation losses or current value of your car.
About the author: Financial blogger and business owner, Meg Stefanac, has more than 15 years experience working in the financial services industry and enjoys helping individuals make solid financial decisions. Meg has extensive experience writing about insurance and finances and is a key contributor to TrustedChoice.com.
« End of box »