How to reduce your car’s depreciation

New vehicle prices deal sticker shock to some car buyers, especially when they discover that the value of their new ride drops significantly the moment it is driven off the dealer’s lot.

A vehicle’s loss in value over time is inevitable. However, savvy buyers can save almost thousands by buying a new model after the vehicle’s initial sharp depreciation and then selling or trade-in it before the price drops again a few years later.

Read on for tips on beating car depreciation and learn how it fits into the overall cost of car ownership.

What is car depreciation?

Like other accessories that wear out through regular use, a car loses some of its value every year due to the everyday wear and tear that comes with aging. This loss in value is known as car depreciation.

Car depreciation rates vary depending on the year, make and model of the vehicle. The car’s market value suffers the most significant depreciation in the first year, with most vehicles losing about 20% or more of their original value. From there the losses are decreasing. Cars often lose about 60% of their original purchase price within the first five years.

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When it comes time to sell your car, you may find that the depreciation has greatly reduced the expected trade-in value for a well-functioning automobile.

The trade-in value of a car is the amount an auto dealer is willing to deduct from the purchase price of a new or used automobile in trading your existing vehicle. The trade-in amount is based on several parameters, including the make and model of the car, its age and condition at the time of trade.

Other factors can also affect the market value of a vehicle. For example, the supply chain disruptions resulting from the COVID-19 pandemic led to a shortage of the computer chips needed for new cars. As a result, the decreased inventory of new cars increased demand for older vehicles – and increased prices.

How to use depreciation to your advantage

Because of depreciation, the older your car at trade-in, the less credit you’ll get for a new purchase, and the less money potential buyers are willing to pay in a private sale.

If the vehicle is in good condition, keeping your car longer than average at trade-in time can sometimes be beneficial. However, the rate of depreciation slows down once the odometer reaches 100,000 miles. Of course, there are exceptions, with top-rated and desirable vehicles like some pickup trucks receiving high trade-in deals.

Smart buyers looking for a good deal can turn the car’s depreciation in their favor. Used cars cost much less than new cars because depreciation affects a vehicle, regardless of its condition. You can buy a 1 year old car that is almost as good as new, but pay only 80% or more of the original price.

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Buying an older car from the current model year or previous model year is the best strategy for buyers who want to beat car depreciation while still tapping into the remainder of the initial factory warranty. Choosing a vehicle from the manufacturer’s Certified Pre-Owned program can be a good option. CPO cars must meet strict inspection guidelines and other criteria to qualify for the designation.

Car Depreciation Hacks

Car owners should understand car depreciation to help them manage the loss of value when selling or trading in their vehicles. To help keep the resale value high, sellers can consider these tips for reducing car depreciation.

  • maintain your car. Keeping a record of routine maintenance reflects responsible car ownership, which helps value the vehicle.

  • Sell ​​the car yourself. Convenience is a factor when trading in your car at a dealership. However, a private sale allows you to sell at market value and keeps the cost in the price of the used car by the dealer.

  • Don’t Customize Your Car. Aftermarket customization shows your style, but it also limits the number of potential buyers. Avoid flashy add-ons to keep your car attractive to most used car buyers.

  • Look for Tax Breaks. If you use your vehicle for your business or side gig, check with your tax advisor about the possibility of deducting a portion of the car’s depreciation on your tax return.

cost of owning a car

Car depreciation is a portion of the cost of owning a vehicle. Along with the loss of value, you will have out-of-pocket expenses such as fuel, maintenance, repairs and insurance. Knowing the total cost of owning a vehicle ahead of time can help you save money in the long run.

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Even if the two new vehicles are priced the same, there may be a greater loss of value over time. Before you buy a car, use KBB’s 5-Year Cost to Own tool to compare the total cost of ownership of vehicles, including the car depreciation calculator.

For example, a 2020 Subaru Fuji,
-2.76%
In the compact SUV category, the Forester has a 5-year cost-to-own figure of $34,119, which includes $14,255 in depreciation. By comparison, a 2020 Hyundai HYMTF,
-0.16%
The cost of the Tucson SE is $2,000 more over five years due to the higher depreciation of $15,407.

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Why car depreciation matters

The good thing about depreciation is that it only matters when you get rid of the car. Its value comes in handy when you sell an automobile, trade it in to offset the price of a different vehicle, or when your insurance company “totals” the car after a significant accident.

Until then, there’s no need to worry about how much your car is worth now compared to when you first bought it. The car will continue to depreciate until it is usable. And even cars that aren’t driveable are worth something in the junkyard.

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When buying a used car, it’s a good idea to consider the age of the vehicle and the number on its odometer. It is even more important to see how well the owner has maintained the vehicle. A 10-year-old car with 100,000 miles may receive more TLC than a 5-year-old model with 50,000 miles.

While you can’t avoid it, you can fight car depreciation by taking good care of your investments. Keep this in mind before it’s time to get rid of your ride.

this story originally ran KBB.com.

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