Unlike investments, such as real estate, mutual funds or savings bonds, the purchase of a vehicle typically does not result in a long-term financial gain. Through a process known as depreciation, your vehicle loses its value over time. Depreciation occurs whether you drive the vehicle frequently or leave it parked in a garage for months at a time.
Immediate Impact
When you purchase a vehicle, it begins to depreciate as soon as you drive it off the lot, as your new vehicle is now considered to be used. According to BuyingAdvice.com, the average depreciation rate ranges from 15 to 20 percent in the first year alone. Vehicles continue to depreciate at a rate of about 10 percent per year during years two through five. This means that by year six, your vehicle has lost more than half of its original value.
Factors
A number of factors contribute to the depreciation rate and subsequent value of your vehicle. The more miles you drive, the faster your vehicle will depreciate, as higher mileage generally results in increased wear and tear. How well you take care of the vehicle is also important, as poor vehicle condition reduces its value. Some models also depreciate more rapidly than others, regardless of their condition or the number of miles driven.
Depreciation Effects
Depreciation will have its biggest effect when it comes time to get rid of the vehicle. When you go to trade the vehicle in, the car dealer will take depreciation into account when assessing how much it will give you toward the purchase of the new vehicle. If you sell the vehicle privately, a savvy buyer will check resources, such as Kelley Blue Book, to determine the true market value of your vehicle while factoring in depreciation.
Total Loss Implications
Depending on how much of a new vehicle purchase you finance, the decrease in the vehicle's value due to depreciation may mean that you may owe more than the vehicle is worth, a situation referred to as being "upside down." If your insurance company declares your vehicle a total loss as the result of an accident, you're still responsible for any balance still owed to the lender. You can avoid this predicament by purchasing gap insurance when you buy the car, which will cover the difference for you.
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