When Depreciation is Your Friend
Posted Wednesday, Dec 19, 2018
In the automotive world, depreciation is always used in a negative way, and, in most cases, rightly so. I mean, who wants to face the fact that your brand-new car is suddenly worth a couple thousand dollars less just because you’ve owned it a few months? If you decide to trade it back in or sell it, you’ll take a substantial loss. And the funny thing is that the depreciation doesn’t follow a straight line; it follows a parabolic curve. So, a vehicle loses most of its value immediately (some lose 10% the moment you drive off the lot), and as the months or years pass, the amount of value loss is less. For example, a $30,000 car may lose $5000-$9000 in value the first year and then lose another $2000-$5000 the next year. At some point, it may only lose a few hundred dollars per year. However, if you’re in the market for a used car, depreciation is your friend, and the parabola of loss can be your friend.
When you buy a used car, you’ve allowed someone else to take the value loss. And if you buy a vehicle that’s a few years old, you will be buying at a point on the parabola where it’s flattening out- for all practical purposes, the car has lost most of the value that it’s gonna lose.
Additionally, some vehicles depreciate more quickly than others. (The attached chart doesn't show individual models, but does compare several common makes.) This doesn’t necessarily mean that particular automobile is no good; it just isn’t in demand as much as others. One great example is the Chevy Cruze. I’ve driven several company owned Cruzes, and they were all wonderful cars. Cruzes average a value loss of 34% in the first two years, though. So, if you can find a well-cared-for Cruze that’s 4 or 5 years old, it will certainly be a great buy- it will have experienced most of its value loss, but will have retained its operational value. In fact, what the chart shows is that a used car that's 3-5 years old is one of the best buys, no matter the make. So, the next time you hear of a particular type of car having a steep depreciation curve, remember that depreciation is your friend if you're a used car shopper.
Photo courtesy of reasonablerides.com