One of the biggest drawbacks of buying a new car is that it is subject to large amounts of depreciation. As soon as you drive your car home, it depreciates a bit from its original value. As a car owner, it is important for you to consider the effect of depreciation on your vehicle.
Auto Depreciation
While every car is a little different, the majority of vehicles depreciate rapidly in value. As a rule of thumb, you could figure that your car will depreciate 15 percent per year from the time you buy it. After a few years, the vehicle will be worth much less than it originally was. If you try to sell the car, it will usually not fetch a price that will pay you back for the amount you owe on the loan.
Upside Down
A common issue that car owners have to deal with is getting into an upside down position on their car loans. When you take out a vehicle loan for a new car and the value of the car drops, you now owe more than what your car is worth. The amount of principal that you pay on your loan probably will not help you keep up with depreciation. If you crash the car, this could lead to having to pay more than what the insurance company gives you for the loss.
Protecting Against Depreciation
Even though you cannot stop depreciation on your car, you can help protect yourself from it. If you wreck your car and have to pay more than what the insurance company gives you, it could be financially devastating. For this issue, purchase gap insurance when you get your auto loan. Gap insurance pays you for the difference between what your auto insurance pays and how much you owe on your loan. This ensures that you will never owe any more money if your car is totaled.
Value versus Reliability
Many people who plan on keeping a car for many years tend to be concerned with how each car retains its value. Instead of worrying about the value that it keeps as it gets older, you may want to be more concerned with how it holds up. If you have to spend a great deal of money fixing the car up every year, the value will not help you much. In this case, choosing a car that is reliable and can run well once it takes on a great deal of mileage will benefit you.
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