Does a new car depreciate the most during the first year of ownership? How is the depreciation after the first year?

 

The value drops as soon as you drive it off the lot.

And it depends on the car how much it depreciates each year.

 

It's a curve... the highest part of the curve is in the first year, then it slowly levels out...

There's some good info on the web if you google for auto depreciation...

http://www.coeinc.org/AllSections/auto.htm

There are several things that you should consider before deciding whether to pay cash or borrow the money when you purchase your next auto. First, there is the fact that an automobile is a disposable item. Everyday it becomes worth less and less until its only value is that of salvage. This is called depreciation. When you graph the depreciation curve of an automobile, you will notice that it is not linear.



In other words, it does not depreciate in value an equal amount each year. Most of the depreciation occurs during the first few years of the cars life. According to consumer reports, a new car will depreciate approximately 40-60% within the first 4 years. For example, even with a car that has a relatively strong resale value, the results are still sobering. A 2001 Honda Accord has a MSRP of $25,500 while a 1997 Honda Accord would sell for approximately $13,000 or approximately 50% of the original sticker price. The rapid depreciation of new automobiles far exceeds the amortization period of normal auto loans of four and five years. When you finance an item that decreases in value faster than the loan is repaid, you no longer have the collateral to repay the loan in the event you become unable to make the payments (unexpected job loss, etc.). This puts you in a position of "surety" (Proverb 22:26). This is also referred to as being "upside down" in the loan. Therefore, if you must finance your next auto purchase, do it in a way that will allow you to repay the loan faster than the value of the auto depreciates. This can be accomplished by getting a short term on the loan (1-2 years). Of course, if the auto you purchase is used, the depreciation will be at a slower rate. However, many lending institutions are not always as generous when making loans for used cars as they are for new ones.

It is a common occurrence that the need for a replacement vehicle occurs before the money required to purchase it is available. The result is that you are forced to borrow the money to purchase the auto due to being unprepared. The problems start when you go shopping for an auto with a "payment mentality" rather than a "purchase price" mentality. This usually will result in the purchase or lease of a vehicle that is outside of your logical financial ability. In the years that follow, as the car gets older and requires maintenance, the owner will still be making payments. Before long the emotional distress pushes the owner to consider another new replacement vehicle and the cycle starts over again. It is compounded when the old vehicle is traded-in for less than its value. This process continues to eat away at the financial health of even the most well-intended person. This conditions you to believe that you will always have a car payment as long as you drive. It doesn't have to be this way.

You need to get into the financial position that will allow you to make a car payment to yourself and stop being a slave to the bank. To do this, you must start with less expensive cars and work your way up.

 

That is an excellent post.
Thanks.

So if a person that likes to change cars every 1 to 2 years should lease instead?

 

If you keep a car only 1-2 years, buy a late model USED car or you're just wasting money.

Lease: not a great idea unless you get HIGH residuals on the particular vehicles you lease. Best lease terms normally are at 30-39 months. That is when the depreciation levels out and leaves, roughly, about 50% of the cars worth.

So, a manufacturer will usually give a higher interest rate and unfavorable residuals before the 30-39 month mark(because they don't want the car back until the value levels off, etc).

Bottom line, owning a new car less than 36 months is only wise if you get a hell of a discount. Leasing is great between 30-48 months though, with best rates at the magic number 39.

 

Will the second year depreciate more than the first?

 

Not usually. Not unless they announce the termination of the model or there are major recalls to consider.

 

I do agree with what most of what people are saying but there are exceptions to every rule.....

The best way to watch the REAL residual value of a car is to see what they are selling for in your area. A 2004 Mitsubishi will lose a lot more value percentage wise then a 2004 Acura or 2004 Lexus- in the real world. I am SHOCKED when I see that 2004 TSX's are selling for like 90% of MSRP with 20k+ miles on them- but am glad because I own one

A great example of what to do to ensure higher then average residual value it to purchase cars with a good track record of holding value and cars that are not reduced heavily. Look at what GM is doing right now, all of there current line up is going to be worth dick on the used market for years to come because the "you pay what we pay" program. Another prime example of over valued MSRP is the Q45 you can get DEEP discounts on them(and have been able to for a couple of years) that will give you poor resale value. Keep in mind residual value(%) is based on what its worth from MSRP and NOT what you paid.

Its never a wise move financially to purchase a new car and it makes no sense to lease unless you own a business- IMO. But if your a car nut and like cars, then it may be worth it to you. I am in my mid-20's and have had about 9 new vehicles(of which 4 were leased through one of my business'), having kept none of them longer then 3 years. Sure I lose a lot on them, but I like cars so to me its worth it- its not like I am struggling to pay my bills so I can spend my money how I see fit. Also I make sure I am never "upside down" on any of them, this way if I ever want to change vehicles its easy and less costly.

In other words use your head, don't get in to deep and always plan ahead!

 

I have a 2004 TL 6mt/navi. I'm thinking about trading it. The quality is not what I expected in a Acura and the service I have been receiving is just not up to par.

I owe a little under $20K on the loan. I was planning on trading a year from now. Is it better to trade now or a year from now? My TL will be a year old at the end of August.

I'm still thinking what I should do.

 

Unfortunately, there's nothing a consumer can do to ensure a higher resale on a lease, manufacturers and the ALG hold all the cards there. Leasing can make great sense when you own a business, but that's certainly not the only reason to lease. More car, less money is usually the main reason.

Comes down to what makes sense for each person.

 

Try selling it outright first.

 

also, check the KBB value and autotrader.com for the city nearest you and see what they're going for used. That'll give you an idea of whether or not you are upside down. Also you might want to consider trading in. If you trade in you can actually save some money and it wont be too far off from selling private party.

In most states, if you trade in, you can save money on sales tax. For example, if you trade in a car and they give you $14000 on a car and the new one you are purchasing is $30000. You are only taxed on the $16000 remaining. Which means if you're at 7% sales tax you are saving $980.
So... if the difference between private party and trade in value is only $1200. Some people prefer to just trade it in. If you try to sell private party, you've got to spend money to list it, you've got to let strangers drive your car and you never know what might happen. Some just consider it a hassle.
But again it all depends on what the market is like. So go to a dealership and let them quote you on a trade in. Just keep in mine some dealers undercut the trade in value just to "pretend" to get you a good deal on a car when you are buying. So be sure to research research research. Go to many dealers that sell what you want to buy and get a "trade-in" quote. Then check your local autotrader.com listings and see what's there. Of course look at KBB.com as well and see if you're better off just trading it in.

 

In some states (like MA) you can do the same thing with a private sale. You just have to fillout the correct paperwork with the registry and sell and buy within 30 days (or something like that IIRC).

 

It's called a tax-credit. In DE it's 60 days. Doesn't matter if you trade or sell.

 

How long does it pay to keep a car? I understand that as a car ages it depreciates less but it seems to me that there comes a time when the repair bills and questionabe reliability make it wise to trade. i drive a 2000 TL with 79000 miles and am thinking that it will soon be time to trade. The car is almost 6 yrs old (puchased in Dec. 99) and will soon need a timing belt, water pump etc. On my last car the starter went and incovenienced me several times before the problem was fixed so I'm a little gun shy when it comes to keeping older cars. Does it pay to keep the car or is it time to trade??

 

Depends on the car...like you said, repair bills can outweigh the benefit of no payments.

I would rather pay a car payment(reasonable car payment anyhow) and know I am OK to drive wherever without worrying about a break-down or expensive repair.

 

Like Chris said, it depends...

When I bought my CLS, I figured I'd keep it for 5 years or 60K miles. It might be worth 15K by then (36K miles now). I know that an acura dealer won't certify a car after 75K miles, so that's another mileage milestone that I'm looking at.

100k miles used to be a big milestone for cars, but with cars lasting longer now its less of an issue for a properly maintained vehicle. With the Honda/Acura vehicles needing a major service (timing belt, water pump, spark plugs, etc) at around the 105K mark, that's another thing to consider. Might be prudent to sell the car before the major service is required.

If the car is paid off, a few thousand dollars for the service might be wise too. Putting 1500-2000 into a car to get a few more years out of it would probably be better then having to get back into making monthly payments.

On my old 94 Tbird, I had the thing paid off for 4 years before I decided it was time to get rid of it. Repairs weren't that bad at the end (computer, a/c compressor - only about $800 total) but @136K miles the transmission was starting to act funny, so I bailed... I probably could have had the tranny rebuilt for 1500-2000 and milked it for another couple of years, but after driving it for close to 9 years total, it was time for a change...

 

thats the way i feel also, i know that i will prob be getting rid of my car way before the 100k mark, just so i don't have to pay for the 105k service