Why Does a New Car Lose Value After It's Driven off the Lot?

November 6, 2013

Personal finance gurus advise buying a late model used car over a new car due to first-year depreciation. Learn why new cars take such a rapid hit.

Knowing that a new car depreciates the minute you drive it off the lot is disheartening. Depreciation occurs in all cars, and there are several reasons why this happens.

Factors in Depreciation

When you drive a car off the lot, you have agreed to pay the dealer a certain amount of money for the car. Even if you only drive it down the road and change your mind, you are now looking at a car that is only worth the wholesale value. The wholesale value is always less than the original retail value of the car. For a brand new car this initial depreciation can be in the thousands.

Learn How to Retain the Value of your New Car >>

How well you maintain a car, the model of the car and the mileage of the car also affect the depreciated value. Some cars are more sought after, and therefore retain a higher value throughout their life.

How Much Can I Expect My New Car to Depreciate?

A new car depreciates or loses value almost immediately after you drive it off a dealer's lot. As a quick rule of thumb, a car will lose between 15% and 20% of its value each year according to Bankrate.com. A car in its second year will be worth 80% to 85% of its first year value and a car in its third year will be worth 80% to 85% of its second-year value.

Influences on a New Car's Depreciation
The amount that a vehicle depreciates varies depending on the make, model, year, type and other factors associated with the car. If you are looking to retain as much value as you can for your new car, there are some tips that will influence the rate of depreciation for your vehicle.

The Color of Your New Car
Believe it or not, the color of the car will influence the rate of depreciation. Cars that have a neutral paint color such as black or silver retain more value than those with more exotic paint colors. This is because neutral colors tend to remain popular in the future, resulting in a higher resale value than those that have been customized to fit the personality of the owner.

Maintenance and Reputation
New cars with low maintenance and a reputation for high quality also have good resale values and lower depreciation rates. Brands such as Toyota and Honda enjoy good maintenance records and have a reputation for being very well built cars.

How to Retain the Value of Your New Car

Lots of new car buyers are always looking a few steps down the road to the time when they eventually want to re-sell their vehicle. This is only natural, as not all drivers want to keep a car or truck for the entirety of its driving life (which may be several decades). Rather than drive around in an outdated model, they rely on a good solid used car private sale to get them into a newer vehicle. Others trade in at dealerships. Either way, there are some guidelines for getting the most out of your used car.

  • Complete regularly scheduled maintenance. To keep your car or truck in its best shape long term, make sure you get any oil changes and tune-ups done. Many shops and dealers offer service by the mileage, for example, 60k or 100k miles services, to keep a vehicle at the top of its game. Without these needed checks, engine problems or other major issues can ground a car or truck while it otherwise would still be in its prime.
  • Keep the service records. A buyer of a used car will often want to see how that vehicle has been maintained over its prior life. When you have the service records handy, showing that you have done all of the work to keep a vehicle in good condition, you're adding value to your sale.
  • Keep the interior clean. One huge problem with resale of a vehicle concerns its interior. Seats, dashboards, and all internal areas of the vehicle need to be in excellent shape for a premium sale price. Otherwise, bad interior conditions will be a red flag to the buyer. Buyers like to negotiate prices downward for cosmetic problems in the interior of a vehicle.
  • Garage the vehicle. Another way to wreck the resale value of a vehicle is to let its paint job get weathered to the point where it looks bad. Garaging a vehicle means its exterior will be spotless, and this will also bring a great resale price. If you don't have a garage, keeping your vehicle under a vinyl cover is another good option.
  • Keep features in shape. As a car ages, all of those extras start to go. Power windows, seats and other electrical features gradually wear down and stop working. The air conditioning system gets leaks or runs out of refrigerant. Tape decks or CD players start developing troublesome problems. All of these will bring resale price down. One way to slow the gradual decay of features is to avoid over-using them, or to do any maintenance before the problems get too big to fix.
  • Add more features. Some owners who want great resale prices go a step further with features: they upgrade their vehicle for the road ahead with neat accessories including engine accessories, lights, tinting or aftermarket stereo add-ons. One of the most popular fixes is to install new speakers for the best sound possible in the interior of the vehicle.

The above will help a driver to keep a lot of value in what can be a huge investment: a car or truck that will eventually get sold out of the owner's hands.

Maintaining a New Car in Good Condition After You Buy It

Purchasing a used or new car is a great feeling. However just like your parents may have told you when you drove your first car, a car means responsibility. Except in this case, your responsibility is to yourself. Maintaining a car in good condition helps save its value from depreciation, which is going to save you money in the long run; especially when you decide to replace it.

There are a few simple steps you can take to keep your car looking and running like new for as long as possible:

  • Use the owner's manual for routine maintenance. Look in the owner's manual for the car so you know the manufacturers' recommended service intervals and do your best to follow them. Unfortunately, maintenance can be costly; but it's much cheaper and easier to budget routine maintenance for a car then having to pay for major repairs. The owner's manual usually has a place where you can record the services you perform. It's a good idea to save your receipts each time you have the vehicle repaired or have maintenance done; even a simple oil change. This will come in handy when you sell the car in the future; it shows that you've done your best to keep the car running well.
  • Keep it clean. These days a lot of us are pressed for time and it's hard to make the time to do something as simple as vacuuming your car's floor, or wiping off the dash. However, the reality is that keeping your car clean will keep it looking newer for longer; not just because there's not dirt and trash laying around, but because leaving these things contribute to wear and tear on your car's interior. Old drink cups and cans leak, leaving stains. Dirt and grit in the carpet has an effect like rubbing the floor with sandpaper, wearing out the fibers much faster than they would otherwise. Use armor-all or a similar cleaner on the vinyl and leather surfaces in the car. This helps protect them from wear and sun damage. You can tell when a car's interior has been properly taken care of, because it stays looking great for years.
  • Listen to what your car is telling you. There are a variety of different warnings that your car will give you if something is wrong. Get out of your car every once in awhile and listen to the engine for any noises. Even keep a record of what you hear so you can check for changes. There's probably a "notes" section in the back of your owner's manual so you can track of this. Check your fluids on a schedule; it's easy to do and it's one of the most important and most neglected aspects of car care. You don't have to do it every day, just do it periodically. Try doing it every third fill-up of fuel to make sure you're keeping everything in the car at the proper levels. Always pay attention to the lights and indicators on the dash. These are your last warning that something is seriously wrong. If one of these warnings is activated, you should stop driving immediately and look in your owner's manual so you know the proper steps to take to avoid damage to your car.

How to Sell Your Brand New Car

There may be a need to sell your brand new car for one reason or another. You may just want to get it off your hands so you can get another car or you may no longer be able to afford it. Luckily, there are plenty of options available to you if you decide to sell your car. Here are a few things to keep in mind.

Finding a Buyer
Whether you place an ad in a newspaper, or use online sources, you will fare better if you sell your car to a private individual. Using a new car as a trade in for another car usually won't get you the best price. You can find a private buyer who can finance the car on their own, then simply transfer ownership via a title transfer and the car is then out of your hands.

Donating Your Car
There may be a time where donation seems like a better idea. This is common for people who have to leave the country for work and don't have time to deal with selling the car. You are still responsible for the payments, and won't be able to donate your car unless it's been paid off. Donating your car is also a good idea if you want the tax deduction. You can donate your car locally to a variety of agencies. A quick Internet search will show you many places that will pick up the car for no charge.

Don't Just Let It Go
A lot of people in a financial bind will end up just abandoning their cars. They figure if they can't make the payments, and can't find a buyer, that just leaving it somewhere is the best option. This is never the case though. The finance company will still hold you responsible for the payments. Abandoned cars are also more likely to be vandalized and stolen from. You will end up being responsible for any damage as well.

Selling a brand new car doesn't have to be a hassle or a headache. With the right tools and some patience, you can find the perfect buyer.

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