Car Depreciation Rules

Buying a new car is a big financial commitment, whether you dip into your savings or finance the car and take on a monthly payment. In either case, one thing you'll need to prepare for is depreciation, which occurs over time as a car naturally loses value. Understanding the rules of depreciation can help you maintain your car's value and plan ahead for its sale or trade-in.

Factors

Many different factors contribute to auto depreciation. They include the region where you buy your car, the make, the model, the optional features and how many miles you put on the odometer each year. Heavy use and damage will speed up the depreciation process but even if you keep your car in excellent condition it will lose up to 20 percent of its value within a year, according to Edmunds (10 percent of which it loses the moment you drive it off the dealership lot and it goes from new to used). As a rule, sports cars and other rare vehicles hold their value better than more common cars simply because buyers interested in used models will have fewer options to select from. New models and major changes to a model line drive down the value of older cars that take on an outdated appearance or reputation.

Gap Insurance

One situation where vehicle depreciation should matter to you is when you finance your purchase and need to consider gap insurance. Depending on your down payment, you only own a small percentage of your car when you drive it off the dealer's lot. Even though you have insurance, it will only pay for the car's actual value, which begins to fall immediately. If you owe more than your car is worth, gap insurance is an optional form of insurance that will pay for the difference in the event of an accident that your insurance provider deems a total loss. The faster your vehicle depreciates the more use you might have for gap insurance until you make enough payments to reduce your loan debt below the depreciated value of your car.

Lease Agreements

Another case where depreciation figures into your financial decisions is when you opt to lease a vehicle. At the end of the lease you'll have the option to turn your car in or pay the predetermined buyout and own the car. However, because of depreciation buyouts seldom represent reasonable values. Most cars depreciate to well below the buyout, which means you'd be better off turning in your car and buying a similar model elsewhere for market value. If your vehicle doesn't depreciate because of special features or meticulous care, the buyout might even represent a bargain.

Tips

There are several ways to slow the rate at which your car depreciates. One is to avoid excessive mileage, which drives down value. Another is to keep the car in generally good repair and attend to accident damage promptly. Much of your control over how fast your car depreciates disappears once you make a buying decision, so research used examples of each model you consider and see how well they hold their value. More expensive engine options or performance packages may slow depreciation rates, especially for sports and luxury cars, but they're still unlikely to pay for themselves when it comes time to sell your vehicle.