There's nothing like that new car smell!
Unfortunately, as soon as you drive that new car off the dealership lot, it starts to depreciate in value.
What's depreciation?
Depreciation is how much less value an asset has over time. It happens to all sorts of things you buy. For example, your new phone isn't worth nearly as much after you've been using it for a year. Your new clothes aren't worth as much after you've worn them. And a new car is worth less as soon as you put a few miles on it.
The amount your car will depreciate depends on the car itself and on how you drive it.
To calculate how much your car has depreciated, take your original purchase price and subtract the current market value of your vehicle. You can find your current market value by going to a website like Kelley Blue Book. You'll want to include information about your car, such as the color, make and model, whether you've been in an accident and whether it needs a new paint job, as well as the features it came with.
Some cars depreciate faster than others. For example, electric vehicles lose more value faster than conventional gas cars and trucks. In part, this is because battery technology and reliability are changing so quickly. Luxury vehicles also can depreciate more quickly than cars with fewer bells and whistles.
A new car takes its biggest hit to depreciation in the first year, losing up to 30% of its value. After the first year, depreciation slows down. After five years, the average, gas-powered car can lose more than 40% of its value. Electric cars can lose more than 50% of their value in the same time period.
So what does this mean for your car purchase?
You should think about your car preferences and how long you plan to keep the car. If you buy a new car, it's likely that you could be "upside down" on your loan for a few years, meaning that you owe more for the car than the car is worth. (This is why we always recommend "gap insurance," which can cover the difference between what you owe in payments and the car's value. If your car gets totaled in an accident, you could owe more than your insurance company is willing to pay you based on the car's value.)
However, if you choose to buy a new car but plan to keep it for as long as you reasonably can, depreciation may be less of a factor that goes into your calculations, since you'll be trying to keep it running long after it's paid off.
How can you minimize depreciation?
There are three main ways to minimize depreciation when you're buying a car.
- The first way is by purchasing a used car. You can save a lot of money and still get a great car if you choose one that's just a year or two old.
- You can also minimize the effects of depreciation by keeping a car into it's "reward stage" — when the car is fully paid off and you're still driving it.
- The third way: Keep up with your maintenance. Sticking to the regular recommended service for your vehicle can help keep it in peak physical condition, which will give it more value when you trade it in or sell it late. Regular maintenance can also keep your car running longer if you choose to keep it.
The bottom line: Do your research! When you're looking at cars, whether new or used, look at the depreciation value.
Another great way to save? Come talk to us at CommonWealth One! We have great rates on both new and used vehicle purchases, as well as gap insurance.
We hope you have fun with your new (or new to you!) ride this fall!