What Is Car Depreciation & How Does It Affect Me?
When you purchase a vehicle, did you know it can start to lose its value as soon as you drive it off the lot? After you buy a brand new car, it drops 9 to 11% of its value on average once you sign the papers and drive it home. Before you make your next car purchase, learn how depreciation will affect it.
How Does It Work?
Depreciation is the difference between the amount you buy a car for and the amount you sell or trade it in for. Let’s say you decide to purchase a brand new 2024 vehicle from a dealership for $30,999. The initial price is usually the true market price for vehicles with almost 0 miles. Once you sign the paperwork and drive it away, the value of the car has depreciated, or gone down and now has “wear and tear”.
If you have instant buyer’s remorse, drive back to the dealership, and try to sell it back, you are not going to get the original amount you paid. Instead, it will have depreciated in the couple of minutes you were gone. In this example, we will say your car depreciated by 9% and the most you may get is $28,209.09.
When you make a vehicle purchase, don’t expect to get your money back out of it. Instead, between maintenance and insurance, cars are often referred to as money pits. Of course, this doesn’t stop most people from buying a new car due to commutes, lack of alternative transportation, and more.
Depreciation Factors
Can you control how much your car depreciates? Some factors that can be regulated to maintain your car’s value, while other factors are simply out of your hands. Key depreciation factors are:
- Mileage – The more you drive, the less your car is worth.
- Fuel Economy – Cars that get more miles per gallon or run on electricity don’t depreciate as fast as other gas-guzzling models. Why? People find value in saving money at the pump!
- Car Model – It is easier to sell a vehicle that someone actually wants. If you have a popular car model, you are more likely to get more out of it.
- Condition – Everyone wants to find that “diamond in the rough” when it comes to used car buying – meaning if there is interior or exterior damage to your vehicle when you try to sell it, it will put a dent in how much you get out of it.
When Does Depreciation Matter?
Depreciation affects your car’s resale value. If you pay $20,000 for a new car and drive it for a month, you can’t expect to sell it for the full amount you bought it at. Even for a month, there is wear and tear and miles on your vehicle that will make people think twice before buying. If you plan on driving the car forever, there are still other ways depreciation affects your car.
How does depreciation affect car insurance?
Your insurer needs to assess the costs of replacing and repairing your new vehicle. If you total your vehicle, oftentimes, you get two options:
- Actual Cash Value (ACV) – The insurance company will pay the amount your vehicle is worth, factoring in depreciation values, whether it has been in an accident, and recent quality repairs.
- Replacement Cost – The insurance company will pay for a new vehicle that is equivalent in value to the one you totaled in the accident.
Do accidents affect the value of my car?
Imagine this. You bought a new car for $30,000 and finance it for the next 5 years at 5% APR. You make $566.14 minimum monthly payments on time every month, yet your car depreciates $1,000 on average per month. As you continue to make payments, the value of your vehicle goes down. After owning the car for 15 months, you still owe $21,507.90.
Then, life happens and you get into an accident and total it. In most cases, insurance will cover the actual value of the vehicle. At cost, your vehicle has depreciated $1,000 each month and is currently worth $15,000. Your insurance will cover the valued amount of the vehicle, but you will be responsible for the difference: $6,507.90. And let face it. No one wants to continue making payments on a car you can’t drive anymore.
Vehicles should be seen as lucrative investments. For your personal wealth growth, you are better off buying stocks, or even a house. What matters when you are purchasing a vehicle is getting a good interest rate and buying the best car for your needs.