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Used Cars and Depreciation

Used cars and depreciation go together in an inevitable and unstoppable way. As a car ages, with very limited exceptions, it declines in value. This decline is known as depreciation. The fact that a car depreciates works against sellers and in favor of buyers of used vehicles. Knowing how depreciation works and understanding how fast your car or the one you want to buy is declining in value can help you come to a fair bargain on a purchase price whether you are the buyer or the seller.

Auto Depreciation Explained

Depreciation is the simple decline in monetary value of an automobile over its useful life. If you are trying to find a good deal on a used car, it is very important to get a handle on this concept and use it to your advantage. Most buyers understand well the advantages of buying used, which include the fact that you can save money on your car insurance versus the cost of insuring the same car new. But the biggest advantage in buying new is the savings you can enjoy off of that purchase price. And this is why understanding depreciation is so important.

Many vehicle owners become emotionally attached to their cars over the course of time. This is totally natural and in fact is actually one of the more enjoyable parts of the ownership experience, unlike replacing spark plugs. However, it can also cloud the judgment of a vehicle owner looking to sell. That owner who has done such a good job taking care of a car thinks it is worth more than it really is just because they took care of it. But the value is the value, and depreciation doesn’t stop for anyone (except classic car owners).

Best Values on Used Cars

As a general rule, a vehicle is going to lose around 15 to 20 percent of its value every year. This is why a two or three year old vehicle, even a low miles machine in great shape, is really only worth half of the original MSRP. The seller in this scenario remembers how much he paid for the car and knows that it is in near mint; but the seller knows that if she really wanted to pay that much, she’d just go to the dealer and buy new.

According to this basic rule of thumb, a truck that’s a year old might be worth 80 or 85 percent of its original value; and a four year old truck might be worth around 80 to 85 percent of its value as a three year old vehicle. This process is not perfectly linear; as the car ages, the monetary amount of average depreciation goes down because the overall value of the vehicle goes down. These are just averages and there are definitely some variances with some automobiles holding their value better due to higher quality, stronger demand, or other reasons. But the biggest hit comes in the first year, with the brand new machine worth a lot less than you paid for it as soon as you take possession. We pay retail for cars, but as soon as we leave the lot with them, all they are worth is essentially wholesale, which is the amount the dealer would pay to buy them back.

Getting a good value on a used car as a buyer requires understanding used vehicle depreciation and realizing that even a well maintained machine is still subject to this decline. And for sellers, understanding depreciation gives them more realistic expectations for what they might be able to fetch when selling their used vehicles.

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