Understanding Depreciation Important when Buying a Vehicle

One of the biggest advantages of purchasing a used car is something known as depreciation. The word is bandied about wherever used cars are sold or used car buyers shop. Yet, asked for a definition, many people struggle to come up with what, exactly, the word means.

Simply put, depreciation is the decreasing value of a car over time. Unlike a home, cars lose value as they are used and time passes. This means that a car’s current value is invariably less than the price set at the time the car was purchased.
In fact, all cars suffer depreciation — even those recently purchased. A common rule of thumb is that a brand new car, once driven off the dealer’s lot, has lost about one half of its value.

Therefore, a car purchased for $30,000 may only be worth $15,000 a short time later — even though the owner could still be making payments on a loan for the full price of the car.

The new car cost rises even further when financing is added to the picture. In addition to the purchase price (much of which will depreciate quickly), the new car buyer will now be paying interest as payments are made on the new car. Instead of making payments on a less expensive, previously owned car, however, the new car buyer is making payments (including additional interest) on the full purchase price of the car.

If the car held its value, that might be a wise investment. Yet new cars in particular will depreciate considerably. “The largest amount of depreciation takes place in the first year,” explains Inder Jaisingh of Falore Nissan in Sunnyvale.
While depreciation hurts the buyers of new cars, it is a huge advantage to anyone considering a used car — even if the car is just one or two years old.

“Depreciation is the biggest advantage for the buyer of a used car,” Jaisingh notes.

Returning to the new car someone paid $30,000 to purchase, the savings on a used car, thanks to depreciation, are clear. Let’s say that new car is actually leased, and winds up on a used car lot just one or two years later. Chances are, the car is now available for purchase for $10,000 to $15,000, depending on the model, mileage, and wear and tear.

Even with financing, the used car buyer is purchasing the same car for about one half to one third of the car’s original price. Plus, the used car buyer is making payments (including interest) on the lesser amount.

“Depreciation really makes buying a used car worth it,” Jaisingh notes. “When cars come off their leases, particularly domestic cars, the residuals [the amount of money the car is worth] are so low. Imports are a bit higher,” he adds, pointing out that in either case, used cars are an option worth considering.