Appreciating the value of depreciation

Courtesy of Richard Perry
Richard Perry, The Hemet Car Guy.

Greetings from the Hemet Car Guy,

Last week I returned from the National Independent Auto Dealers Association. Boy there’s lots of good stuff going on. One of the things I learned was that the average person owns 13 cars in their lifetime, each costing an average of $30,000, according to a report by the National Automobile Dealers Association.

So theoretically, if each of those cars was three years old, instead of new, you could save nearly $130,000 during your lifetime. The real money savings in a used car comes from the words “depreciation” or “residual value,” as leasing companies like to call it.

Depreciation: New cars, dark cloud
Once you understand how depreciation takes money out of your wallet, you’ll learn how to save a lot of cash. You might have heard that a car loses 20 percent of its value as soon as you buy it. Yes, it really does – a $30,000 car will lose $6,000 in value as you happily drive off the dealer’s lot. By the end of the first year, mileage and wear and tear could bring that loss to 30 percent, or $9,000. So why don’t you feel it? Because it takes effect much later, when you sell or trade in your car. That is the cost of ownership.

Take a look at this comparison: one new car and one used.
New-car depreciation: You buy the car for $30,000 and sell it three years later for $15,000. The car has cost you $15,000 in depreciation.

Used-car depreciation: Now let’s say you buy the same car, but it’s three years old when you buy it. You buy the car for $15,000. Three years later you could sell it for $10,000. So the used car depreciation cost you only $5,000.
Through the years, I have had clients that say, “I only buy new, and I like driving a brand new car!” Although I never talk people out of what they want, they need to know that if driving a new car is worth an extra $10,000 to them, then they should go for it. But don’t say I didn’t give you the information.

Forget the old used-car stigmas
It used to be common for people to put down used cars by saying that “it is just buying someone else’s problems.” That’s really not true anymore, especially with online vehicle search engines such as CarFax, where you can check the vehicle’s history. The other two most common concerns about buying a used car are reliability and maintenance issues.

However, cars have never been more dependable than they are today. It’s not uncommon for some cars to deliver more than 100,000 miles before needing any type of major repairs. And as for maintenance, all cars require regular maintenance such as oil changes, tire rotation and brake jobs. But you can drive today’s cars much farther in between these scheduled maintenance visits. Even tires and brake pads last much longer than before.

Additional used car advantages
There are other advantages to buying a used, rather than a new, car:
• Lower car insurance rates: When a vehicle is worth less, it costs less to insure it when you’re buying collision and comprehensive coverage. You can also drop collision and comprehensive coverage, which pay for repairs to your car, and save even more.
• Vehicle registration fees: The cost of registering a used car goes down every year.
• More purchasing power: Because you can save 30 percent or more, you can shop in a higher class of cars and go for that luxury vehicle you could never afford brand new.
• Less stress. Got a ding in the door? Who cares? But when it’s the first dent in your new car, it’s a big deal – no one wants to be the first to put that first little ding on it.

New-car advantages
While nearly everything about used cars costs less, buying a new car does have its advantages:
• New car shopping is easier: All new cars are assumed to be perfect, so evaluating the condition isn’t a factor. No need to take it to a mechanic. Also, it’s easier to figure out what you should pay for a new car, even if the negotiation process is still a hassle.
• More financing options: Manufacturers offer plenty of incentives to lure in buyers, such as cash rebates. And new cars typically have better interest rates for financing. This means you’ll likely pay thousands of dollars less than the frightening sticker price once you negotiate a final price and apply any incentives.
• Advanced technology: New features for comfort, performance and safety are introduced every year. You’ll need to wait several years to get them in a used model.
• Peace of mind: A new car will likely be more reliable than a used one, even though pre-owned cars are much more dependable than in the past. If a new car breaks down, many items can be fixed for free under the included factory warranty, at least for the first three years or 36,000 miles.

However, not all cars depreciate at the same rate. Some brands are known for holding their value exceptionally well. When you add in possible new-car incentives and low-interest financing, there are times when buying a new car doesn’t cost much more than buying a model that’s one or two years old.

Several automotive websites can help you calculate the depreciation value, such as Kelley Blue Book’s “5-Year Cost to Own” or Consumer Reports’ “Cost of Vehicle Ownership.”

What it means for you
Depreciation is a silent killer to your automotive budget. Purchase cars that hold their value to minimize the effects. It also helps to keep your car longer and properly maintain it.

Hope this helps,
The Hemet Car Guy

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