Vehicle Depreciation Rate - Why You Lose Money
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As you all know by now, almost never a car bought, let's say today, will be sold again in the future, no matter how distant, at the same price. The difference between the price paid at the purchase and the money received after selling the car is called the depreciation rate.
There are countless factors which influence the depreciation rate of a vehicle, each relating to a specific attribute of the car. Factors like the geographic region where the car is being sold/bought, the state of the economy and even the season in which the purchasing process takes place influences the final price of the car. With that in mind, it is nearly impossible to accurately predict how much one would lose on a car.
Still, there are several criteria used mostly by insurance companies to evaluate the depreciation rate which pretty much reveal the extent of the loss.
The better regarded the car you are buying, the better the chance you will have to sell it again without losing too much money on it. Famous, reliable, well positioned brands will always have a smaller depreciation rate than other vehicles.
When buying a new car, you should put aside the "I'll pay less, I'll lose less" thinking, because usually that's not the case. In fact, it is almost the exact opposite that happens: the cheaper the car, the more money you will lose when reselling it.
Even more, the better equipped the vehicle is, regardless of the nature of the features, the more the chances of selling it at a fair price. Let's combine the factors mentioned so far to give you a set of examples.
One of the most severe depreciations of a new vehicle takes place when the car is bought. As soon as the papers are filled and the happy new owner turns the key in the ignition, the car loses up to 20 percent of its value. While the owner has to pay the dealer what is called the retail price of the car, he/she is left with the wholesale value of the vehicle, meaning that if he/she were to sell it back to the dealer instantly, they would have to do so at the wholesale price. Usually, the difference between the two is of in between 15 and 20 percent.
Example 1 – you buy a low-cost vehicle, with front airbags, CD player and ABS as the only standard features. The price which you will pay when buying it new is, let's assume, 8,000 euros (or dollars, if you like). As soon as you drive the car off the dealer's parking lot, the car will lose the aforementioned 15 to 20 percent of its value. This means that five minutes ago you paid 8,000 euros for a car which is now worth only 6,400 euros.
In time, the car will lose an additional 15 to 20 percent of its remaining value each year. This means that if you keep the car for one year, you may have to sell it for only 5,120 euros. Your total loss amounts to 2,880 euros.
Example 2 – You buy the same type of car, but packed with features like alarm systems, GPS or whatever. Of course, you will pay a little extra for it, let's say 10,000 euros. Once you start the engine, thanks to the fact that the car comes equipped with features which will serve it well in the years to come, you will no longer lose 20 percent of its value, but let's say 15 percent.
This means you lose 1,500 euros on the spot. Over the year you own it, the depreciation rate will be 15 percent as well, meaning you will lose an extra 1,274 euros. At the end of the period, the car will be worth 8,223 euros, which means you lost only 2,774 euros. Nearly 100 euros less, although you paid 2,000 more when you bought it.
WHY THIS HAPPENS
As we have already explained why a car losses some of its worth instantly after purchase, let's see why it continues to do so over the years. The car depreciate in time because, basically, it gets old. Its looks may no longer suit the specific requirements of the time and its features might be outdated, all leading to a loss in value for the car.
Things become even worse if during the time you owned the car it suffered some sort of damage, or if you neglected to service it properly. Some of the biggest losses in value comes not from the age of the car, but from the events it went through until the moment it is sold.
As you have seen in the examples listed above, some vehicles depreciate less, while others more. Factors which influence the depreciation rate are the make of the car, the notoriety of the brand, the features it comes equipped with (including engines, safety and comfort features), its mileage, servicing intervals, warranty, accidents it was involved in and so on.
As you have seen in the example above, it is often better to pay more for a vehicle in the beginning, as you will lose less money in the long run.
EXCEPTIONS
Still, not all cars follow the same rules. The rarer the car, the smaller the depreciation rate. In extreme cases, the rarer the car, the bigger the chances of even making a profit when reselling it.
In very rare cases, vehicles become better by age. These types of cars are the so called collectibles and, whereas at the moment of their creation were worth only a few thousands, now are being sold for millions. They are usually pretty old, rare and at times have been owned by celebrities, so if you're thinking your grandchildren may sell your Logan MCV for hundreds of thousands in the future, forget it.
comments written so far
On 21 February 2010 at 05:24 UTC, Ben said:
Or, a better way not to waste your money is to buy one of those "1 year old" used car.
Example one : you can now get this low cost vehicle for only 5120 ?
Example two : same car with higher level of equipment for 8223 ?
Of course, you'll louse between 15 and 20 percent of this value each year. But first, you won't loose the initial 20 percent when leaving the dealer with your brand new car and second, 20 percent of 5120 is less than 20 percent of 8000.
I can give you one real example :
I bought a 2000 megane convertible for 8500 ? in 2005. It had 63 000 Km. I've sold it 4400 ? 4 years later with 137 00 Km. Loss : 4100 ?
If I had bought a brand new Megane CC at the same time, it would have cost me about 25 000 ? (that I didn't had) to get a proper one. And four years later, with 75 000 km, it woud have worth only about 12 000 ?. Loss : 13 000 ?.
And in both cases, I would have had to do maintenance over those 75 000 Km. Maybe more on the old Megane, but the new one would have had to be done at a Renault dealer, not to loose the warranty. So I consider that this cost would have been equivalent in both cases.
Now, I couls afford to buy a new car. But I'm still not...
Example one : you can now get this low cost vehicle for only 5120 ?
Example two : same car with higher level of equipment for 8223 ?
Of course, you'll louse between 15 and 20 percent of this value each year. But first, you won't loose the initial 20 percent when leaving the dealer with your brand new car and second, 20 percent of 5120 is less than 20 percent of 8000.
I can give you one real example :
I bought a 2000 megane convertible for 8500 ? in 2005. It had 63 000 Km. I've sold it 4400 ? 4 years later with 137 00 Km. Loss : 4100 ?
If I had bought a brand new Megane CC at the same time, it would have cost me about 25 000 ? (that I didn't had) to get a proper one. And four years later, with 75 000 km, it woud have worth only about 12 000 ?. Loss : 13 000 ?.
And in both cases, I would have had to do maintenance over those 75 000 Km. Maybe more on the old Megane, but the new one would have had to be done at a Renault dealer, not to loose the warranty. So I consider that this cost would have been equivalent in both cases.
Now, I couls afford to buy a new car. But I'm still not...
On 27 March 2010 at 08:20 UTC, Jason said:
I'm thinking of buying a car again after riding motorbikes for 7 years. I've always believed buying a 1 or 2 year old car is better but never understood it until now.
On 24 June 2010 at 06:36 UTC, Chichi said:
I bout a TOYATA Hillux VVT-i 2007 model in October 2007 Brand New @ R 193 000.00 (South African Rands) or US$ 27571.52. I wanted to sell it in January 2009 and took it to a car dealer who evaluated it @ R 140 000.00 (US$ 20000.00) for 54 000km travelled. I have lost US$ 7571.52 in one year and 3 months.
What a depreciation? Is TOYOTA not famous enough to depreciate this fast?
What a depreciation? Is TOYOTA not famous enough to depreciate this fast?
On 25 September 2010 at 01:35 UTC, titan said:
i disagree with this post because even if you save 100 bucks, the extra 2k would add an additional of $100+ per year in interest at a 5% interest rate. And, in my opinion, if you can buy an old car in cash for 5k, you will save a lot on interest. On top of that, depreciation isn't 15-20% for a used car, because the car isn't pristine; it already has dents. Therefore, the only thing that can significantly lower the value is high mileage and accidents. Of course 10-20% loss per year is likely, but it will be less of a lose, obviousness, since their is less capital being put up.
On 16 October 2010 at 19:33 UTC, neil said:
how long do you have to keep a new car purchase to make up for the 20 percent initial depreciation. For instance I purchased a toyota corolla new in 2000 I am still driving the car and have never had to do anything other than regular maintenance. So if I buy a new vehicle and plan to keep it 6 , 7, 8 years at what point have I made up for the initial loss of depreciation.
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