If you are looking for one piece of advice to escape the paycheck to paycheck lifestyle or simply to reduce your monthly expenses, it’s recommended that you only buy a used car with cash so you are not making monthly loan payments on a depreciating asset. For one reason or another, we can’t always buy a used car. Before you head to the dealership, you might want to consider buying a particular brand that will not depreciate as quickly.
Why Is Car Depreciation So Important?
As soon as you drive a new car off the lot, you car automatically loses approximately 9% of its purchase price. For example, if you buy a $30,000 vehicle and decide five minutes later that you want a refund, your car would be worth $2,700 less. Within five years, your car might only be worth 40% if its original market value making that same $30,000 car only worth $12,000 when you sell it on Craigslist. If you have a five-year loan, you just finished paying $30,000 plus interest and taxes and your car sells for $18,000 less.
Even if you don’t plan on selling your new vehicle within the first five years, maybe you plan on keeping it for 10+ years, how much your new car depreciates can still be important. Insurance companies will only pay you replaceable market value for your vehicle’s make and model with the same number of miles and accessories. The extra cash can mean the difference between having to borrow money for a replacement vehicle and the ability to pay entirely with cash for a quality used vehicle that fits your needs.
The below infographic help shows how quickly a new car will lose its value from the moment you leave the dealership to owning it for five years.
Source: How Fast Does A New Car Lose Value
Depreciation Rates By Car Type
Almost all new cars, regardless of brand, will follow the same depreciation trajectory noted in the infographic. But, some brands and types of cars depreciate less than others.
At this moment, the following types of vehicles hold their value the most:
- Mid-size trucks
- Mid-size SUVs
- Full-size SUVs
With the lowest gas prices in almost 20 years, families and workers prefer these three types of vehicles because of their functionality and durability. Low fuel prices mean they pay less at the pump which in turn increases the demand for the larger vehicles.
What are the worst vehicle types for depreciation right now? Electric vehicles, subcompacts, and luxury vehicles. While there is a large supply of these vehicles, there is less demand. After all, electric vehicles are still not a popular item in rural areas with a lack of charging stations, a family of four will have a hard time squeezing into a subcompact ideal for a couple, and while most people enjoy the looks of a luxury vehicle, they don’t want the sticker price and maintenance costs that come with them.
Market conditions are constantly changing, so, popular vehicles today can quickly lose value overnight if demand suddenly disappears. For example, Volkswagen used car prices dropped after news of an emissions scandal broke.
Depreciation Rates by Car Brand
Brands with a high percentage of car leases tend to have the highest depreciation rates. These higher rates are because many people may not choose to buy the car or renew the lease at the end of the original term. As a result, the dealerships have a high supply and lower demand for the most commonly leased vehicles that causes prices for certain models to be lower. Luxury sedans are the most commonly leased vehicle types and this is one reason why they have one of the worst resale values as 60% of luxury sedans are leased.
Some of the other popular brands to lease are Smart, BMW, Lexus, Lincoln, Cadillac, Buick, Mini, and Honda. On average, 27% of a brand’s vehicle fleet is leased. These brands all have rates above the 27% industry average with Smart leading the pack at 80%. Do you a trend among those brand names? They are primarily known for selling subcompacts or luxury sedans.
Each brand has vehicles that hold (or lose) their value more than others. For example, a Ford F-150 will retain more value than a Ford Fiesta for instance.
While there are many different brands to choose from, this is a partial list of the most common brands. The average depreciation rate takes all models into account, not just one segment like trucks, compacts, or hybrids.
Each brand is ranked from best to worst in terms of average resale value after three years.
Once again, projected resale values for each brand vary by the model. The best way to find the projected depreciation within the next five years is with the Edmunds True Cost to Own Calculator. This tool helps determine how much you can expect to earn from a new vehicle sale.
For the most part, vehicles will all depreciate 40% to 60% within the first three and five years, respectively. But, each car brand makes some vehicles that will hold more value. That can mean be the difference of a couple thousand dollars that can be used for your next vehicle. Before, you sign on the dotted line for the first vehicle that you like, be sure to take a few minutes and research. It’s important to understand which brand, vehicle type gets the best long-term deal.