Buying a new car can be expensive. After you pay the hefty price to drive the car off the dealership lot, you also may experience increased costs for insurance, registration, gas and repairs. However, one of the biggest expenses of new car ownership is the depreciation to the vehicle in the first year that you own it.
Definition
When you buy an item of value, it becomes an asset to you. Some assets decline in value and others increase. Some will do both over the span of their useful lives. If you buy an item with increasing value, then it will appreciate in time and you may be able to sell it for more than what you paid for it. This sometimes occurs with real estate or bonds, for example. If you purchase a product that decreases in value over time, such as an automobile, that is depreciation. Some assets depreciate slowly and others do so at a much faster rate.
Average Depreciation Rates
An automobile is a highly depreciating asset because it loses value as soon as you leave the car dealership. A vehicle also depreciates by sitting in your driveway. Some less expensive cars lose value faster than the ones that cost more, which makes the pricier vehicle a lower expense in the end. Financial people calculate depreciation on a vehicle over five years, even though cars continue to lose value throughout their lifespan, but at a lower rate. When determining the rate of loss on a new vehicle, it is standard to estimate that your car will be worth 15 to 20 percent less during the first year. With an average depreciation rate of 10 percent in subsequent years, the five-year loss averages 65 percent. According to Consumer Reports in 2008, this represents 46 percent of the cost of owning a car during the first five years of its life.
Model Differences
Not all cars depreciate at the same rate. Vehicles considered collector's items or limited editions might hold their value longer. Cars such as the Chevy Corvette, Mini Cooper and Lexus models have higher than average resale values by losing a lower percentage every year. Meanwhile, vehicles manufactured by Hyundai and Kia have lower resale values. When estimating the cost of different cars prior to buying one, check what each will be worth after five years and factor in the loss of value with other expenses.
Value
If you want to sell your car or if you just want to know its value, log on to a website that makes the depreciation calculations for you, such as Kelley Blue Book. Here you can request the trade-in value at a car dealership or the amount you can ask for when selling directly to a private party. Trade-in values will be lower than if you sell to a private party because it's fast and convenient to hand over your old car to the salesman and drive away with a new one. Also, the dealer will resell your car to another person or at an auction and wants to ensure he can make a profit.
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