Value drops in cars is one of your best tools to have during a car purchase. It is a double edged knife as well. If you purchase a vehicle at the wrong time it will cost you money.
A car has a natural depreciation cycle. If you can map the cycle and make your purchase accordingly you can make a value purchase. Of course there are many other factors to purchasing a car but, depreciation is the biggest factor to determining how much you pay for a car.
The 80/20 rule is in full swing here. According to Consumer Reports 48% of the costs of ownership of a car is the depreciation (for the first 5 years). According to the Consumer Reports data 24% of ownership is the fuel costs. These two factors collectively equal 72% of the ownership costs.
Consumer Reports further divided up the ownership costs between carrying costs and operating costs. The data Consumer Reports compiled is in more detail on their web site, but below is my breakdown:.
Edmunds did a great article on the effects of car depreciation in the first 5 years. They have a calculator on their site as well for quick calculations for a new car purchase. I compiled their percentages with a $26,000 new car as the example below:
Edmunds figures show the first two years the drop in value is dramatic. In fact if you finance the car purchase and don’t put enough money down you will be upside down on the loan. If you buy the car new you would need to have about a $2,340 down payment to keep the loan from going upside down or more reasonably $5,000 to cover you for the first year.
The money that can be saved by buying the car after the 1st year is 20% of the cost. Additionally if the car is purchased used rather then new the value is lower therefore insurance, tax and the interest on the loan is decreased. This is the domino effect on the expense of car ownership. Only two categories of car ownership are not effected ( fuel and maintenance / repair). The info is helpful for a person for the first five years but, if you are looking at used cars to do something like a WAVE-B Free Ride Project then you need something longer in time.
This is where free-on-line-calculator-use.com has one of the best depreciation calculators (among the many useful ones there). The greatest part of the calculator is the ability to change the depreciation rates if you feel the defaults are not to your liking. I did a similar breakdown as the Edmunds below:
Again the same results the red zone not to buy a car if you want to prevent taking a hit on the depreciation is the first 2-3 years. I made a cheat sheet that has the expected mileage based upon the age of the car. This is helpful because you can figure out the approximate value of a used car. A car with more then average mileage might be worth less then the charted depreciation value (or at least you have a good starting point for negotiating with the sales person)
The car depreciation is something you can use to your advantage. It can help you to be patient on the car you want to buy. The patience also enables you to see if a car is a reliable model which can cut down the cost of maintenance and repair. Don’t take the depreciation hit in the wallet; let it save you money for your wallet.
The ripples of depreciation can mean more money for you. Take a look at Car Depreciation Ripples is Cash.