Buying a new vehicle has its advantages, from a full manufacturer warranty to the peace of mind that comes from knowing that you're the first owner and no one else has abused or neglected your car in the past. But new cars also have a strong tendency to depreciate, or lose value, rapidly.
Why Cars Depreciate
Unlike other large purchases, such as homes, cars generally lose value consistently for the length of time they're on the road. In part, this comes from the fact that cars become less mechanically sound and systems develop a higher likelihood of failure, meaning inconvenience and higher repair costs for older vehicles. In addition, car buyers have new models to choose from, which brings down the value of used cars, including those that aren't very old, by comparison. Even special edition or collectible models often lose value, though they may start at a higher price point or depreciate more slowly because of high levels of demand.
Average Rates
According to the website Auto Evolution, a typical new car will depreciate between 15 and 20 percent as soon as its sold. This initial depreciation comes solely from the car's losing it's "new" status and doesn't depend on mileage, damage or condition. Over the course of five years, Edmunds notes that even the cars that hold the largest portion of their values depreciate around 50 percent. Cars with low residual values can depreciate as much as 80 percent over the course of a five-year ownership period.
Factors
Many factors affect an individual car's level of depreciation. A car's safety ratings, purchase price, reliability reputation and production numbers all weigh heavily on depreciation. Other less-obvious factors include the region where you live, since harsh winters and salted roads can cause a car to rust more quickly than a vehicle in a warmer climate. The condition of the economy also plays a role, with the resale value of a car ultimately dependent on what used car buyers are willing to pay and can actually afford.
Consequences
When you buy a car and resell it years later, the amount of money you receive will depend on the average depreciation for that model, as well as factors like mileage, overall condition and your own negotiating skills. This will determine how much money you get to put toward a new car, either through a private sale or a trade-in at the dealership. But depreciation can also have consequences if you lease or finance your car. Most lease agreements include a purchase price for the driver to buy the car outright at the end of the lease period that ends up being higher than the depreciated resale value of the car. If you finance your vehicle, the initial depreciation will mean that you owe more than your car is actually worth for a time, until you make enough payments or the depreciation rate slows.
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