Typical Car Depreciation

With some exceptions, most cars depreciate the moment you drive them off the lot.

For most Americans, cars are the second biggest investment they make, right behind houses. For some, leasing a car is the way to go. Having a new car in the driveway every two to three years not only makes good financial sense, but keeps drivers on the road and away from the auto mechanic shop. But for others, it's the old adage that a new car "depreciates $10,000 the minute you drive it off the lot" that keeps them from signing a new car purchase agreement.

Used Cars Don't Depreciate

Because of the depreciation, that new car sitting in the driveway costs more than gas, maintenance, insurance and financing combined, a problem a used car doesn't present. Unless you have one of the highly collectible cars, such as a classic Model T or a muscle car like the '69 Mustang, the car you drive is almost guaranteed to lose value.

The Moment It Leaves The Lot

The average cost of depreciation of the typical car is $3,392. Yet most people are unaware that their new vehicle loses 20 percent of its value as soon as it leaves the lot, according to SafeCarGuide.com. Even if you only drive it around the block and then return it, the dealer is compelled to give you a price closer to wholesale price, less all the taxes and fees you just shelled out.

Depreciation Factors

The first-year depreciation is about 15 percent to 20 percent of the purchase price of the car. This means that on a typical $22,500 new car, the loss is between $6,000 to $8,000. If the car is a little more expensive, say $40,000, the loss is $10,000 to $15,000. After that, the typical depreciation rate is 7 percent to 12 percent annually.

Depreciation is also influenced by how many miles you drive the car every year. The more you drive the car, the more the car depreciates.

Mileage and Mechanics

After the first year, the car continues to depreciate at the rate of about 10 percent a year until it is about four years old. If you drive the car exceptionally hard, have more than what is accepted as normal mileage use, or the car is in need of physical or mechanical repairs, the depreciation will be dramatic. Vehicles kept in mint condition, driven less than the expected mileage, and paid off do not depreciate as quickly.

Popularity Matters

Some new cars do not depreciate as quickly as others. According to SafeCarGuide.com, popular makes such as Hondas hold their value much longer than less-in-vogue cars such as Fords. Also, if a new model looks nothing like the old model, the older version will depreciate more quickly since it will be obvious that it is the older model.

References

• Buying Advice: Most Car Buyers Unaware of Vehicle Depreciation Rate
• Safe Car Guide: Used Cars--A Better Investment