Car Pro Show host Jerry Reynolds talks all the time about the cost of new car depreciation. Not only does your car lose value when you drive it off the lot, but every year when the new models come out. It’s something he says buyers should consider when choosing between buying new or used. It should also factor into the question of how long they plan to keep their vehicle since it impacts resale value down the road.
Depreciation and Other Ownership Costs
A new study from the American Automobile Association backs him up. It looked at depreciation costs in its 2018 Your Driving Costs study. Researchers report that depreciation is the largest expense associated with purchasing a new car. It accounts for almost 40 percent of the cost of owning a new vehicle – more than $3,000 per year.
Overall, AAA’s Your Driving Costs found the average cost to own and operate a new vehicle in 2018 is $8,849 per year. The figure is calculated based on depreciation along with the cost of fuel, maintenance, repairs, insurance, license/registration/taxes, and loan interest.
There are several factors behind new car depreciation, including a shift in consumer preferences. For example, the current market shift from sedans to SUVs and pickups. AAA’s annual analysis found that sedan depreciations costs are up 13 percent over last year because there is a lower demand for them.
Electric and hybrid vehicles are another story. They’ve gone up in popularity, with 20 percent of Americans saying they’ll likely go electric for their next vehicle purchase. That’s up from 15 percent the previous year. So this year these vehicles saw a dip in depreciation.
Length Buyers Plan to Own A Vehicle
AAA says consumers who plan to keep a vehicle for only a few years should be cautious of deep discounts and incentives offered by automakers and dealers. These are often designed to sell less popular models and directly influence depreciation. Low down payments and extended finance terms can also have a similar effect. Stretching a car loan over five, six or even seven years may be an effective way to lower payments, but owners may quickly find themselves owing more than the vehicle is worth. (That’s when they become upside down in their vehicle.)
Leasing is similarly affected since payments are based in part on the projected residual value of the car at the end of the lease. This serves as a good indicator of which models experience higher or lower depreciation. Since resale value is not a factor at the end of the lease period, buyers who prefer less popular models or only want a vehicle for a short time may consider leasing a more viable option.
How to Minimize Depreciation
AAA says the secret to minimizing depreciation costs is to keep your car for a long time and keep it well-maintained or even consider buying a quality, pre-owned vehicle. The bottom line is that depreciation should be a consideration when deciding on a new vehicle, not just price and a monthly payment.
Annual Cost to Own
These numbers from AAA are based on 15,000 miles driven annually.
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