How Fast Does A Car Depreciate?
A shiny white car pulled into our driveway, the door opened and my wife’s cousin hopped out. He had just traded in the car he had been driving for several years and had stopped by visit, and to show us his new ride.
“Nice car!†I said.
“Thanks!†he replied, “It was a good investment.â€
I did like his car, but his calling of it an investment sounded funny to me. A common definition of the word investment is as follows:
The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.
Vehicles don’t appreciate in value, they depreciate. My short conversation with my in-law left me wondering however, just how fast a vehicle depreciates.
The rate at which a care depreciates depends upon several factors:
- Quality : Perceived or real, quality affects how fast a car depreciates. Cars with a good reputation tend to depreciate at a slower rate.
- Fuel Costs : When gas prices spike, cars that do not get good gas mileage will depreciate faster because they cost more to use.
- Age : New cars depreciate very quickly the first few years and then levels off. Typically, a new car will depreciate 19% in the first year, 15% in years 2 and 3. Once a vehicle reaches 5 years old depreciation slows substantially. At around 10 years old, depreciation is negligible – which also means your vehicle isn’t worth very much.
Example:
Given a vehicle with a purchase price of $30,000 one would see the following depreciation over the first 3 years:
Year One:
- Starting Value: $30,000
- Depreciation: 19% ($5700)
- Ending Value: $24,300
Year Two:
- Starting Value: $24,300
- Depreciation: 15% ($3645)
- Ending Value: $20,655
Year Three:
- Starting Value: $20,655
- Depreciation: 15% ($3098)
- Ending Value: $17,557
In total, our new car lost about 42% of it’s value in the first three years.
A car isn’t an investment, it’s a service. You’re buying a convenience service in that you can travel where you want, when you want. That service will cost you. I’m not saying you shouldn’t buy a nice car if that’s how you want to spend your money. But don’t think of it as an investment, think of it as buying a service. Knowing exactly how much that service is going to cost you may help you make a decision as to how much of your hard earned money you’re willing to part with to have it.
How about you Clever Friends? Do you look at the depreciation of a vehicle before you buy it?
Brought to you courtesy of Brock
Brock is a software engineer by day and personal finance blogger at night. He is a fitness junkie and enjoys grilling and smoking meat. Married with two children, Brock strives to improve his skills as a husband and father, and is always on the lookout to stretch his family’s budget as far as he can.
Great article! Short and to the point. I also don’t see car as an investment. But when you’re married, sometimes you have to compromise.
I think part of the reason people call it an investment is because it’s a good word to justify spending that kind of money. That’s not to say some actually think it’s an investment.