Aside from buying a home, the second largest purchase most of us will make in our lives is when we buy a car. And because cars have seemingly become more status symbols than modes of transportation, it feels like the cost of buying a car continues to shoot up.
After we buy the car, we’re still faced with a list of mounting costs – oil changes, tune ups, repairs, gas, insurance, etc. But none of these items can compare to the single largest cost of car ownership – the decrease in the car’s value.
When we buy a car, we pretty much accept the fact that the car’s value is going to depreciate over time; unlike when we purchase a house, when we expect to net a gain over time.
According to an article published in Forbes:
“An average vehicle will retain 35% of its value after five years, according to Kelly Blue Book, meaning that a $20,000 new car today will only be worth $7,000 after five years. But Kelley says a car with excellent residual value, such as a new Mini Cooper, will retain over 50% of its value after five years. To contract that with the bottom of the pack, a Crown Victoria will hold only 22% of its original value after five years.”
So, as you can see, the overall depreciation of a new car can be very different across different makes and models. This of course means that when looking to purchase a new vehicle, its rate of depreciation should be something you take into consideration. If I had to choose between a car that would be worth $10,000 after five years or a car that would be worth $4,400 after five years, I’d probably lean towards the $10,000 car.
All of that being said, you can avoid a lot of the cost of depreciation by simply buying newer used vehicles. If you buy a car that is only three years old and has been kept in good shape, it probably has many, many miles left – but you’re probably only going to pay between 45% and 65% of the car’s original price.
So, if you’re in the market for a new (or new-ish) car, please make sure you take the car’s rate of depreciation into account before making the purchase.Â