Depreciation – A Topic as Exciting as January
We all know these certainties in life: death and taxes. While these two are compelling there is a third one to consider-depreciation. From cell phones, to houses to cars, they all depreciate. For our purposes today let’s talk about depreciation on cars.
Why do New Cars Depreciate so Fast?
There are lots of reasons why a new car depreciates quickly in the first number of years. Here are some of the top reasons.
Consumer Incentives for New Vehicles
A consumer who wants to buy a vehicle used likely will consider a new model as well. Manufacturers may be offering low interest rates or cash incentives to encourage customers to purchase new. Thus, even a lightly used vehicle, only a year old, is partially competing with every new vehicle available in the market. The vehicle’s value is thus discounted against the value of a new vehicle so, to make it competitive it’s value drops in relative terms.
Relative Obsolescence
While not many people are lining up outside Apple stores for new cell phones these days, we all know the one we have now will not be as good as the one available later this year. Vehicles are much the same especially as their components become more computer based. The technology package in a two year old vehicle can be radically different than that in a current model. The technology cycle will continue to make new vehicles more attractive than their counterparts that are one to two years old.
Mileage
Mileage can be both a good thing or a bad thing. Normal to low mileage is okay (about 20-24k/year) but, unusually high mileage can increase depreciation quickly. Again, consumers will compare options. A vehicle two years old with 20,000km versus a new one is one thing people consider. A vehicle with high mileage, at perhaps 50,000km, is another issue all together. Consumers will want to see a discount based on buying a relatively new but, high mileage vehicle.
A Quick Guide to Depreciation
While each vehicle is different, according to Time.com “The typical car depreciates by 60% or more over five years. But certain vehicles, like the Honda Civic and Ford Mustang, only depreciate by an average of 35% over five years — so they can be much cheaper to own, over the long term, compared to cars whose value tanks over time.” This is generally true of most Honda models of course. Consider a 2018 Honda Civic LX that retails for $21,351 plus tax. Using Time’s math, over 5 years the Civic will depreciate only $7,500, versus other makes depreciating $12,800 in the same time period. A savings of $5,300 with the Civic!
The Good News
Eventually depreciation starts to flatten out in the life of the vehicle. A vehicle that is well looked after can certainly provide a great useful life and still sell for a pretty penny when it’s time to upgrade. Furthermore, I’d suggest that after a couple years you and your new vehicle are just getting to know each other. Don’t trade in too soon rather, let the honeymoon linger a little. Your car might have some pleasant surprises for you that you will only know in year two or three (we recently discovered we can fit 6 people in our Pilot with skis and gear comfortably! We didn’t know until we had a reason to try).
Take Advantage of Depreciation
You can try to take advantage of depreciation and find yourself a reasonably depreciated used car that is only a year or two old to buy. This can be a great strategy as you will retain many of the benefits of buying new like, remaining factory warranty, new styling and reasonably new technology. There is a value proposition there for many buyers which is worth considering.
Depreciation is a fact of life. If you are interested in the value of your vehicle, come to Honda West for a free no obligation market value appraisal. If you want to take a look at some lightly depreciated used vehicles check out our used inventory!