What You Need To Know About Your Car Depreciation
- January 2, 2020
- Posted by: BenG-Admin
- Category: Blog, IRS
Time is nobody’s friend, especially if you are a car owner. Unlike other of your assets, a vehicle’s value significantly decreases over time. This phenomenon is depreciation. Car owners do not feel the effect of depreciation until they decide to trade or sell their cars.
In simple words, depreciation is the value that represents the difference between the worth of your car when you purchased it and the value when you sell it. Naturally, every vehicle’s value depreciates over time. Everyday use or poor maintenance leads to the wear and tear of a vehicle. Let us just say, the more a car owner drives his/her car, the faster the vehicle’s value drops.
If you purchase a vehicle today for $20,000 and sell it after three years for $12,000, your vehicle’s value decreased by 40% over three years.
What Leads To Car Depreciation
There are several factors that can damage your car’s value. While car owners can control some of those factors, there is nothing that anybody can do about the others.
Here are some of the reasons why your car’s value decreases over time.
- No Or Poor Maintenance: If you do not keep your car in a good working condition, you will put a dent to its exterior and interior. Make sure you take care of your car’s engine and clean it regularly, inside out.
- Mileage: Any vehicle’s value drastically reduces with more mileage. Keeping your car’s mileage down can help you maintain more of its initial value.
- Fluctuating Economy: How many Hummers do you spot on the road these days? That is because buyers prefer cars that get more miles per gallon.
- Changing Preferences: People’s choices in cars change over time. We witnessed years when Sedans were all the rage and years when everyone preferred SUV’s. The safest bet is to choose a popular brand that continues to dominate the industry. A vehicle that can last for longer years is sure to hold its value more than a vehicle that is infamous for breaking down frequently.
Depreciation is a critical factor of any new vehicle purchase. Buyers can either acknowledge it as part of buying a new car, or limit it by taking important measures.
How Quickly Do Cars Drop In Value?
It is surprising to not that new cars depreciate faster than used cars do, for a number of reasons. Let us see how much faster.
- After An Hour: Your brand new vehicle loses around 9-11% of its initial value the minute you drive it off the lot. Let us just say, you throw away $4,000 out the car window as soon as you drive your brand new $40,000 worth car home for the first time.
- After a Year: According to researches, new vehicles experience a major drop in their value within the first year of ownership. Any vehicle’s value drops by 20% after exactly one year.
- After Half A Decade Or 5 Years: Do not be sad to know that your brand new car’s value is likely to depreciate by 20-25% every year until it reaches the first five-year mark. That means any car that you buy today will lose approximately 60% of its total value, after five years.
How to Manage Depreciation
Do not lose hope yet. While these figures are intimidating, car owners can adopt effective ways to reduce the depreciation value of their prized cars.
Remember, the brand and model of your car can make a whole lot of difference.
Let us look at a few of these strategies.
Purchase Used Cars
There are both pros and cons to purchasing a vehicle on either end of the depreciation scale. Even though it is easier for car owners to sell cars that hold their value well, but it is also difficult to buy these case on the front end. In the meantime, you can get lucky to score a great deal on a five-year-old BMW, but because it is expensive to maintain and repair.
Remember to factor in numerous depreciation rates of different cars. Moreover, figure out why a vehicle or brand loses so little or so much value, before you purchase a used car.
If you plan to sell off your car after a few years, do not invest your hard-earned money on a brand new car. Purchasing a year-old car van help you avoid high depreciation values.
Limit Your Car’s Mileage
According to FHW, Americans drive more than 13,500 miles every year. If you break down this figure, you get something over than 1,000 every month.
We cannot expect you to pedal or bike your way to work. However, there are a few changes you can make to reduce your average mileage. Choosing a carpool service or knocking out all errands in a weekly trip can greatly help you prolong the life of your car, thereby maintaining its value. People who like to plan cross-country road trips can opt for a rental car service. Small changes like these go a long way to reduce your vehicle’s depreciation value.
Stick To Your Car’s Maintenance Schedule
Make sure you maintain your car throughout the year, and not just before the rainy or winter season. A regular maintenance regime includes tire rotations and oil changes. Staying on top of maintenance helps you retain your car’s original value. You will also reduce frequent repair charges that you have to endure when you skip your car check-up appointment.
If you are in doubt, refer to your vehicle’s manual so you know when you have to schedule an appointment.
Buy Reliable Used Cars from Trusted Auto Dealers
Again, investing in new cars is not the best idea when you plan-on selling your car after a few years. While buying a brand new car is tempting, buying a used car that is in a good condition is the best way to purchase a car from a dealer that holds a good reputation.
Now you know why most millionaires drive a two-year old car with 40,000 miles on it. When you buy a used car, you let someone else bear the price of a new vehicle’s rapid depreciation in its initial years, and still end up with a great car.
Do not go for noisy mufflers or features that eventually reduce your vehicle’s value. Potential buyers are skeptical about the modifications as they could indicate potential mechanical issues.
Changing your car’s color can also depreciate its resale value. Do not choose flashy purples, yellows, or reds, which stand out on the road, but are harder to sell. If you must choose a color, pick one that is widely popular.
New cars depreciate faster and are also more expensive to insure. Buyers can save up to 12% on car insurance if they invest in a five-year old vehicle and not a new model. Savings like these help you keep thousands of dollars in your account.
From regular oil changes to tire rotations, it is the little things that make a big difference when it comes to car maintenance and vehicle performance. In addition, staying on top of maintenance helps the car retain its value. For that reason, make sure you follow the tips listed here to make sure your car’s value does not depreciate.