Looking to buy a car? You need to know about depreciation. Cars are assets that lose value over time, even if you’ve spent a lot on buying one. Read on to learn exactly how depreciation works, and what you can do to mitigate potential value loss over time.
How Depreciation Works
Things lose value over time because of wear and tear, a process called depreciation. Not all assets lose value over time — things like stocks and bonds tend to increase in value. And the rate of depreciation is different for everything.
Take a KitchenAid mixer, for instance. If you wanted to sell one immediately after buying it, while it was still in its box, taped up, you could reasonably expect that you’d get close to as much as you paid for it. If you attempted to sell the mixer after a few years of regular use, it would be less valuable to a potential buyer, even if it continued to function well, because at that point, there would likely be fewer years that the mixer would continue to work well. The value could decrease even more if KitchenAid came out with a newer, fancier model, as fewer people would be interested in buying one.
What Makes Cars Different
Cars become less valuable from the moment they are driven off the lot. So, if you were to try and sell a car that you simply drove from the dealership to your home, you would not be able to make back the same amount of money that you paid for the vehicle. According to car research company Kelly Blue Book, that value loss is about 20%.
For cars, this value depreciation only escalates over time, as your car becomes more worn and the car company comes out with newer, fancier models. For the first five years you own a car, they lose about 60% of their value, according to Kelly Blue Book.
How Much Value Your Car Has Lost
If you recently purchased a car and you’re curious about how depreciation will affect its value, you can use a depreciation calculator like this one to determine how much value it has lost. You can also use one of these calculators to determine a sweet spot if you’re considering buying a used vehicle.
So what can you do?
To avoid car depreciation, you should avoid buying a brand new vehicle. Even a car that has been used for less than a year is a smarter investment from a value perspective than one that is completely new.
You can also consider leasing a car. A car lease is like an apartment rental: you use the car for a set period of time, making monthly payments on it and then return it when you’re finished using it. If your payments are late, you have to pay interest. Car leases make sense when you don’t have a ton of money for a down payment, and you need to have a car immediately.
- Alicia McElhaney / She Spends Issue #57