Purchasing a new car is one of the biggest financial steps that the average person takes in a lifetime. While purchasing a car is a big financial investment, it does not improve your financial situation in the long run. The vast majority of vehicles actually depreciate in value over their life. Vehicles do not all depreciate at the same rate, but in most cases, you can be sure that your car is losing value.
First Year Problems
One of the biggest disadvantages of buying a new car is that it depreciates rapidly in the first year. When you buy a new car, it typically depreciates the most of any year during the first year that you own it. According to The Motley Fool, new vehicles depreciate an average of more than 20 percent during their first year. Typically, as soon as you drive it off the lot, it loses a big portion of its value.
Rule of Thumb
While every car is different, plan on most vehicles depreciating at about the same rate each year. According to Bankrate.com, the average car depreciates about 15 to 20 percent every year. This means that in the second year of ownership, it will be worth about 15 percent less than what it was worth at the end of year one. With a depreciation rate like this, it is no wonder that so many people end up owing more than their cars are worth at some point.
Protecting Against Depreciation
When you buy a new car, to protect yourself against this depreciation. Otherwise, if you are in auto accident, you could end up owing money on a vehicle that you cannot drive anymore. Your auto insurance company is only obligated to pay what the value of the car is at the time of the wreck. If you owe more than that, the insurance company will not pay it. To protect against this risk, you may want to purchase a gap insurance policy. This type of insurance pays the difference between what you owe and what the auto insurance company pays if you total your car.
Buying Used
Because of the high rate of depreciation of new vehicles, many people choose to buy used cars. Since the highest percentage of depreciation occurs during the first year of ownership, savvy buyers typically buy a used car that is one to two years old. This way, they can take advantage of the new car features without having to fall victim to the rapid depreciation occurs in the first few years of ownership.
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