New Car Depreciation Myths and Facts

January 27, 2012

There are many schools of thought when it comes to new car depreciation. Some people think that new car depreciation is a myth and that people may not know what they are talking about. Hopefully this article will shed some light and give you the proper information regarding car depreciation values, as well as car depreciation rates. 

Fact: New Cars Depreciate on Day One

This is one of the biggest questions that goes around about new car depreciation. Many people say that when you drive your car off of the lot, it depreciates in value by quite a bit. The usual number is by around 30%, or one third of its value just by driving one mile. Although many people say this is a myth, this is 100% fact. Cars do in fact depreciate once they are driven off of the lot. Once you take that car away, you actually may owe more than it is worth. This is called an upside down loan, and is fairly common. To protect yourself, you may want to purchase gap insurance, or guaranteed asset protection. This type of insurance will cover the difference, or the "gap" between the amount you owe on the loan, and the true value now that it has depreciated. This can be extremely important in the event that you total your car while it is still considered upside down.

Myth: Accidents Don't Affect Depreciation

This myth deals with cars that were involved in accidents. The myth is that these cars will actually be worth the same,as long as they are repaired 100% with new parts. This is not true. If your car is in an accident, it will depreciate quicker, and in turn, be worth less than a car with a clean accident history.

Unique Depreciation

Depreciation for cars is not like the depreciation for the assets of a company or equipment. It is not a straight depreciation method where an equal amount is taken away each year. There are various factors that go into calculating the depreciation for your car. The make and model of your car are extremely important. If you have a popular car that many people do like to buy used, like a Honda, or a luxury car, chances are the depreciation will be less (meaning that they hold their value better). Cars that are not popular for resale (ones with bad ratings) will depreciate quicker, and they will be worth less in the future. It truly matters what type of car it is. For example, the BMW 3 series is a very popular car and won't depreciate that much over the first few years. That does not mean that the BMW 1 series though is as popular, and even though it is nearly the same car, it can have a totally different depreciation pattern.



Related Questions and Answers

Are Car Resale Prices Based Solely on Depreciation Rates?

There are a variety of factors that determine car resale prices. Initial purchase price is the main factor that is considered when car resale prices are determined. Rate of depreciation and age is what is considered next. Once it is known how much value a car loses on a yearly basis, that can then be applied to how old the car is to determine base resale prices. Factory and aftermarket options that are installed will then play a major factor in determining the value of a used car. What the local market will support will be the next major factor in resale prices.

Where Can You Find a Guide for Auto Lease Residual Values?

Auto lease residual values are what the leased vehicle will be worth, as an estimated value, at the end of the lease. In most leases, the residual value of the car will be spelled out in the lease contract, along with possible payment options. Leasing companies have a book they use, The Black Book, when determining auto lease residual values. Leasing companies usually use the "Automotive Lease Guide" when figuring auto lease residual values. Residual values are calculated in two ways. The first is as a percentage of the MSRP when the vehicle is new. And the second is as a percentage lost after every year.

What are the Most Popular Choices for a Used Cars Pricing Guide?

When looking for used cars, a pricing guide will come in quite handy to give you a good idea of what an average price for a specific year, make and model of car is that you can expect to pay. Knowing how much a particular car costs will help you calculate loan payments and insurance rates. A number of companies offer generalized information regarding used car values. edmunds.com offers you what they call TMV or True Market Value, along with in-depth product reviews, Kelley Blue Book has been providing a reliable used car pricing guide for both consumers and dealers for decades. The NADA Guides website and book are also very popular resources for calculating used car pricing.

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