The single most expensive part of car ownership is...
The single most expensive part of car ownership is: its depreciation! It happens instantly, sometimes over 10% depreciation the instant the car is driven off the lot.
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It is no secret that we Americans tend to spend a whole hell of a lot of money on car ownership. In fact, one of my first posts on Think Save Retire examined how devastating cars are to our future selves. They strip money out of our pocketbooks in so many ways, but there is one particular way that financially screws us up more than any other.
The single most expensive part of owning a new car is: its depreciation!
And it happens instantly. Literally, the second that you drive your brand new car off the lot, the Depreciation Gods have already stripped value from that slightly-less-valuable machine that you just bought (Remember: I bought a brand new CTS in 2010 - huge mistake). How much value? Try more than 10%.
An article on Trusted Choice illustrated just how devastating automotive depreciation can be.
For example, the article looked at a car purchase for just over $31,000, which was the average cost of a new car in 2013. Once the car is driven off the lot, the car immediately loses 11% of its value on average. Thus, just a few moments after purchase, the car's value drops to $27,800.
Just a year later, the car is valued at just 75% of its original purchase price, resulting in a one-year drop of a whopping 25%. Worse, three years later the car's value has dropped nearly half. Now, the car that you forked over $31,000 for is worth around $16,800.
After five years, more than 60% of the car's value will be lost to depreciation, even if you keep the car well maintained.
Quick facts on depreciation:
- Depreciation is most severe at the beginning of ownership
- Cars lose an average of 11% of their value the moment they leave the lot
- After the first year, many cars lose a quarter of their value
- Over the first five years, cars can lose as much as 25% of their value each year
Is it ever smart to buy a new car?
Though I would never buy a new car again, depreciation is of little concern if the new car is literally driven into the ground - meaning, you keep the car for as long as it will physically operate, or until the value of the car is at ZERO. Depreciation hits drivers hardest if they attempt to sell the vehicle when the car still holds value. If you buy a new car, keep it as long as possible to avoid depreciation losses.
But like I said, I've made this mistake before and would NEVER buy a new car again unless I had a very compelling reason. Instead, I'd choose to buy a used car that has already depreciated quite a bit, and then proceed to drive it into the ground. Nowadays, I prefer to buy my cars at around half of their original value by looking for them used.
What accounts for the rate of depreciation?
In general, cars that are easier to sell tend to depreciate slower than cars that are tougher to sell. That means depreciation on a popular Honda Accord model will be less severe than depreciation on a Jaguar XJ, for example.
But, there are so many variables that determine how rapidly cars lose their value. This interesting Forbes article compared the depreciation rate between a Chevy Cobalt and a much more expensive BMW M3. Though the M3 sets drivers back almost $60k and lost over half its value in five years, the Chevy Cobalt retained less than 20% of its original value!
Why? According to the Forbes article, the Cobalt hasn't be updated by the manufacturer in a while and fails to draw in buyers the way other cars might. In addition, inexpensive subcompact cars like the Cobalt, Kia Rio and Chrysler Sebring tend to be sold in bulk to car fleets (i.e.: rental car companies), which helps diminish their value more rapidly. Ironically, car companies that depend on these high-volume fleet sales - such as Chrysler - help their internal sales numbers while at the same time kill the value of their own cars.
Modifications to cars can also affect their value. Restored cars can fetch quite a bit more than the original purchase price, but uncommon paint jobs or other extreme modifications to cars can often reduce their value to other buyers.
From the Forbes article:
The best way to avoid deprecation is to drive fewer miles, says Ibara. And resist the temptation to detail your car in a way that may not appeal to future owners: Silver cars appeal to most second-hand buyers; a pink car does not.
10 cars that depreciate like a stock market crash
A Popular Mechanics article cited 10 of the worst performing cars from a depreciation standpoint, and the results are interesting.
Which cars faired the worst? The BMW 7-Series, Bentley Arnage, Range Rover, Cadillac Escalade, Aston Martin DB7, Mercedes Benz S-Class, Maserati Coupe, Audi A8, Jaguar S-Type and Volkswagen Phaeton.
What's the moral of this story? The more exotic the car, the greater the depreciation (of course that's not always true).
Let's move on to more consumer-class vehicles.
An article published in the Washington Post early this year looked at the top 10 cars with the largest difference in price after just one year of ownership. Toping the list is the Hyundai Genesis, followed by cars like the Cadillac CTS (that's mine, dammit!), GMC Yukon, Lincoln MKS and the Jaguar XK. Is your car on the list?
How to take advantage of automotive depreciation
With all this talk of cars losing value, there is a bright, shiny positive in all of this. If you are looking for a new car, consider a slightly (gently?) used car instead with the greatest deprecation rate. For example, if you're looking for a new Hyundai Genesis, consider looking for a one or two year old Genesis instead and pay a third less for the vehicle.
In other words, find used vehicles that have already depreciated. Remember, the newer the car, the greater the depreciation rate.
How do you find cars with the greatest depreciation rates? Google is your friend. Try a search for "2015 highest car depreciation" for results from organizations like Kelley Blue Book, Auto Blog and Bank Rate - and so, so many others (including the Popular Mechanics post I cited earlier). Browse through these sources to get a feel for which cars tend to make the list more than others.
For example, Top 10 cars to buy used over new, which I stumbled on 2 minutes after diving into one of the search results (all car links will bring you over to the I See Cars blog):
$ Price Difference over the First Year
% Price Difference over the First Year
In general, a good rule of thumb when car buying is:
- If you NEED new, look for cars with the best resale value
- If you are okay with slightly used, look for cars with the greatest depreciation
And if you just want to blow a bunch of money on a car that you don't need, do what I did and buy a brand new Cadillac CTS, then look to sell it about six years later. :)