Car Buying Tips: What You Should Know About Depreciation & Inflation
Figuring out what type of vehicle you can afford to buy is difficult. Why? It involves far more than just looking at the purchase price of every vehicle. You need to factor in ownership costs, too.
Ownership costs are any costs that are related to owning a vehicle. Some of the most common ownership costs are fuel, insurance, repairs, and maintenance. However, there are two other hidden costs of owning a vehicle that many people forget about when calculating their budget.
These hidden costs are depreciation and inflation. If you’re planning on buying a new car, it’s important to understand how both of these hidden costs will impact your vehicle’s value and your wallet. Here’s what you should know:
What is Depreciation?
Depreciation refers to the rate at which an asset’s value declines over time. All assets that suffer wear and tear with normal use, including vehicles, depreciate. In simpler terms, this means the value of your vehicle will drop as it ages. All vehicles depreciate, which means your vehicle will lose value as it gets older regardless of whether you purchased it new or used.
How Quickly Do Cars Depreciate?
Before you purchase a vehicle, it’s important to understand how quickly it will depreciate so you know how much the vehicle will be worth in the future.
There are a number of factors that can impact how quickly a vehicle depreciates, which is why every car depreciates at a different rate. Some of these factors include:
- Age: The value of a car will decrease as it gets older.
- Type of car: The make and model can impact the vehicle’s depreciation rate. Makes and models that are in high demand tend to depreciate at a slower rate than vehicles that are not as popular.
- Mileage: The lower the miles, the longer the vehicle will last and the greater its value. As a result, vehicles with high mileage depreciate at a faster rate than vehicles with low mileage.
- Condition: Normal wear and tear won’t have a huge impact on a vehicle’s depreciation rate. However, if a vehicle has suffered extensive damage, it will depreciate at a much faster rate.
- Color: You might be surprised to learn that the color can impact a vehicle’s depreciation rate. Vehicles with a traditional paint color typically depreciate at a slower rate than vehicles with a custom paint job or unusual color.
- Fuel prices: If gas prices are low, fuel efficient vehicles may not retain as much value as they get older. On the other hand, if gas prices are high, fuel efficient vehicles will depreciate slowly and gas-powered vehicles will depreciate quickly.
- Manufacturer’s reputation: Some manufacturers are known for producing reliable, durable vehicles. The vehicles produced by these manufacturers may depreciate at a slower rate than others.
In general, new cars depreciate much faster than used cars. The value of a new car typically drops around 20% during its first year of ownership. After the first year, the value of a new car will continue to decrease by about 10% per year. This rate won’t continue forever, though. Depreciation slows down once the car is five years old and comes to a halt once it is 10 years old.
Which Cars Have the Fastest Depreciation Rates?
Depreciation rates vary widely, but some vehicles are known for depreciating at a faster rate than others. According to the U.S. News & World Report, these are the vehicles with the fastest five-year depreciation rates:
|Make and Model||Average Five-Year Depreciation Rate|
|Mercedes-Benz S Class||67.1%|
|Mercedes-Benz E Class||69%|
|BMW 5 Series||70.1%|
|BMW 7 Series||72.6%|
The starting price of a BMW 7 Series is currently $86,800. Based on the data provided by U.S. News & World Report, this means that the vehicle will lose 72.6% of its initial value by the time it is five years old. In other words, a BMW 7 Series that is purchased today for $86,800 may only be worth around $24,000 in five years.
Luxury vehicles dominate this list, which is not surprising, given that luxury vehicles tend to depreciate faster than others.
Which Cars Have the Slowest Depreciation Rates?
Some vehicles are known for retaining their value better than others. According to the U.S. News & World Report, the vehicles with the slowest five-year depreciation rates are:
|Make and Model||Average Five-Year Depreciation Rate|
|Jeep Wrangler Unlimited||30.9%|
The starting price of a Jeep Wrangler Unlimited is currently $77,095. According to this data, a Jeep Wrangler Unlimited that is purchased today will lose about 30.9% of its value over the next five years. This means if you purchase a Jeep Wrangler Unlimited for $77,095 today, it will be worth about $53,273 in five years.
Based on this list, it’s clear that pickup trucks, sporty sedans, and truck-based SUVs tend to depreciate at a slower rate than other vehicles.
How Can Your Car’s Depreciation Affect You?
By now, you should understand what depreciation is and how quickly you can expect a new vehicle to depreciate. However, you may be wondering why this information matters and more importantly, how your vehicle’s depreciation rate will impact you.
Your vehicle’s depreciation rate can impact you in several ways. First, a vehicle’s depreciation rate will affect its resale and trade-in value. Even if you don’t plan on selling your vehicle any time soon, it’s important to know how quickly it will depreciate so you know what you can expect to get for it when it’s time to sell it or trade it in.
The depreciation rate can also impact you if you took out an auto loan to pay for your new car. If your vehicle depreciates too quickly, you may end up having negative equity, which means you owe more on your vehicle than it is worth. This is often referred to as being “underwater” on your auto loan. If you try to sell your vehicle while you are underwater on your auto loan, you may end up owing your lender money.
For example, if you owe $10,000 on your vehicle but you can only sell it for $8,000 due to depreciation, you will need to pay your lender $2,000 to make up the difference once the vehicle sells.
For these reasons, it’s crucial to consider a vehicle’s depreciation rate when deciding whether it’s right for you.
How to Slow Down Your Vehicle’s Depreciation
There are a number of things you can do to reduce your vehicle’s depreciation rate, including:
- Don’t drive a lot. The fewer miles you put on your vehicle, the slower it will depreciate.
- Take good care of your vehicle. Schedule regular oil changes and other maintenance services. Doing this will help your vehicle retain more of its value over the years, especially if you keep the maintenance records as proof.
- Preserve the exterior. Exposure to environmental elements such as rain, heat, cold, and ice can slowly damage the exterior of your vehicle. This damage can cause the vehicle to depreciate quickly. To prevent this problem, park your vehicle in a garage to protect it from these harsh environmental elements.
What is Inflation?
Depreciation isn’t the only factor you should consider when purchasing a car. You also need to think about inflation.
The term “inflation” refers to the decrease in the purchasing power of money, which is displayed as an increase in the prices of goods and services. In other words, the price of things increases, so the value of every dollar decreases.
The inflation rate is the rate at which the value of the dollar is falling and the prices of goods and services are increasing.
How Does Inflation Affect Your Car’s Value?
Just like depreciation, inflation can affect your car’s value. Inflation causes the prices of goods and services, including vehicles, to increase. If the inflation rate goes up, the price of your vehicle may increase as well. This means you may be able to get more money for your vehicle if you choose to sell it when inflation rates are high.
However, it’s important to note that a high inflation rate will increase the cost of new cars, too. So although you may get more for your vehicle if you sell it when inflation rates are high, you may need to spend even more to purchase another vehicle since new car prices will most likely be higher as well.
Now you know the basics of depreciation, inflation, and more importantly, how these two hidden costs will impact you if you purchase a new car. Keep this information in mind when shopping for a new car so you can choose the vehicle that’s best for your lifestyle and your budget.