drive car off lot, car value


It can be worse than you think

Quick notes:

  • Many potential new car buyers don’t realize how much their potential purchase can depreciate

  • Depreciation can reach double-digit percentages by the end of the first year

  • Some cars hold their value better than others

When you’re out looking for a replacement set of wheels, it can be tempting to look at new cars that are just off the manufacturer’s floor. It is comforting to know the entire history of your car and to be the first person to put mileage on the vehicle’s odometer.

However, there’s a massive downside to owning a new car. Almost the second you drive it off of the showroom floor, the car’s value drops. Seeing exactly how much a new car’s value is lost can make anyone rethink if it’s worth the inevitable impact on your wallet.

Depreciation at the 1 month, 3-year and 5-year mark

There are definite points during which your new car drops its value fast. The first point is after the initial month that you’re driving it when it loses about ten percent of its total value. The next drop point is after you’ve been driving it for about a year when it loses another ten percent. One-fifth of the car’s value is a lot to take over the first 12 months, isn’t it?

If you’ve bought new and you hold onto your car for a few years, the trend continues. According to one report, by 3 years, buyers may have lost an additional 20 or even 25 percent of their vehicle’s value. By 5 years, the value may rise to as much as 63 percent.

Why new cars depreciate so quickly

Why do new cars lose their value so fast? It is likely because once any item, including a car, is owned by someone else, it becomes psychologically less appealing than an untouched version of the same item. That “new car smell” also comes with new car bells and whistles and a new car prestige that buyers are simply willing to pay more for. The older model can’t hold a candle to a fresher one.

Do some new cars hold their value better?

While all cars lose value, some vehicles do better than others. Each year, Kelley Bue Book presents an annual listing of cars that held their best value over five years. In 2019, their best brand for resale value overall, across all make and model types, was Toyota. On the luxury side of sales, their best brand was Porsche.

While all cars lose value, some cars do better than others

Both of these carmakers had won the award for three years in a row. What do they know that others don’t? For Toyota, it is merely their ability to focus on making reliable, durable cars that are in demand because buyers can count on them. For Porsche, the cars are likely to retain their demand because their luxury vehicles are paired with the company’s longstanding heritage as an iconic, one-of-a-kind carmaker.

When depreciation might not matter as much

If you’re planning to sell your car quickly, in the first 1 to 5 years, you’ll want to be sure that it holds as much value for the resale as possible.

Believe it or not, there may be times when loss of a car’s value may not matter as much. Then, it makes more sense to buy new.

However, if your car purchase is a long term investment, and you hope to be the only owner, then short-term depreciation might not matter as much. You’ll get your value out of the car over its lifetime. In fact, it might even benefit you to have bought a new car since you’ll be able to be 100% sure about the car’s history.

A deeper dive –  Related reading from the 101:

You’re not alone in these money mistakes | Finance 101
Here are some of the most common money mistakes people make.

Bad habits that make you financially unstable | Finance 101
Avoid these habits, and you’ll be a lot better off.