Simply put, depreciation is the difference between what you paid for your vehicle, and what you would get if you were to trade it in or sell it. If you’re the type who buys a car and keeps it until its last stop is the auto recycler, depreciation probably won’t be an issue for you. But it can be important if you plan to move into something else in a few years, and it’s a factor when you’re looking at a used car.
“Depreciation happens because nobody wants to buy old things,” says Josh Bailey, vice-president of research and editorial at Canadian Black Book, which publishes value guides for new and used vehicles. “Once you start to wear out anything you buy, its value is lessened, especially with the complex nature of cars. People start to add mileage and wear, and that comes off what the car is worth.”
Actually figuring out residual values—what a vehicle will be worth down the road, whether it’s brand-new or already a used car—involves a number of factors, including the type of vehicle and the equipment it has, the brand’s reputation for reliability, the cost of repairs, and its fuel consumption.
There are also external factors, including forecasts for inflation, employment, fuel prices, and any MSRP changes due to shifting currency values. “When we were adjusting for U.S. and Canadian dollar parity back in 2008, moving those prices down also had an impact on the value of cars already on the road,” Bailey says. “The subsequent lower prices on new (2008) cars reduced the value of the 2007 models.”
Incentives on new vehicles will have a considerable effect on residual values as well. If a manufacturer knocks enough off the price of a brand-new vehicle, it can come close enough to the price of a used one that many buyers will pay the difference in order to get a pristine model and its full warranty.
Compromise of luxury
As a rule, luxury cars tend to have the largest drops in value. “I think there’s as much image involved as anything else,” Bailey says. “When you’re talking about a BMW 7 Series, or Mercedes-Benz S-Class, or Audi A8, pulling up to your golf club in a used car doesn’t have the same cachet as pulling up in the very latest.
“When you move down a couple more pegs, to a 5 Series or E-Class, there’s also a stigma attached to a used one, because they’re going to cost more than a Honda Civic to repair. The people who want them can’t afford to keep them.”
The cost of repair is one of the key factors in depreciation: the more it’s going to cost to fix, the less it’s going to be worth to the next buyer. Before you consider any “value-priced” premium-brand vehicle, do your homework. Price out the cost of repairs you can reasonably expect to see, such as brakes or steering components, along with maintenance items such as oil changes. These costs will not only reflect the cost of ownership to you, but can substantially reduce the amount of money you’ll get for the vehicle if you’re planning on reselling it after a few years.
What are the “options”?
The number of options can also affect the resale value, but not always in the way you’d think. A fully-loaded car will cost more to buy, but that may not translate into more money at trade-in time if buyers suspect they’ll be shelling out big bucks to fix any that fail, especially if it’s an electronic device.
Cars take their biggest financial hit in their first and second year, and you can use this to your advantage, but be sure you’ve looked at all the factors. A car that did fleet duty and has high mileage could be a great deal, especially if you’re not going to be racking up the same amount of driving, and if you’re planning on keeping the car for a while.
If incentives are tempting you to look at a new car, rather than one that’s a couple of years old, look at the full price before you sign on the dotted line. That enticing figure trumpeted in the manufacturer’s ad probably doesn’t include freight and dealer charges, which could easily add a couple of thousand dollars to the final price. On top of that, you will be the one taking the hit on its initial depreciation drop. You may get less for the used car if you resell it down the road, but you might not have lost as much on it overall.
Sport Coupe? Sedan? Family Ferry?
The type of vehicle will also play a role in its resale value, and therefore in its depreciation. Despite the higher fuel costs, pickup trucks will tend to hold their value better than cars, because of their usefulness as work vehicles. And while you may prefer a stick shift, they can be a tough sell in used vehicles, since many people haven’t learned to drive them, or prefer the ease of an automatic, especially in mainstream vehicles.
Worth the gas?
Fuel consumption plays a role, but look at the big picture. When fuel prices rise, there’s a corresponding drop in the value of thirsty vehicles. But depending on how much you drive, the price difference between a fuel-sipper and a guzzler may be more than enough to offset the extra you’ll pay in fuel.
If you’re buying a vehicle with the intention of keeping it for a few years and then selling it, condition is also a factor. You’d think it would be obvious, but a surprising number of people don’t bother to keep their cars clean, don’t worry about scrapes or dings, and aren’t careful about maintenance and repairs—and then they wonder why they can’t persuade someone to pay the price they’re asking. The highest dollar always goes to the car that looks like it’s worth it.
“Typically, a new-car buyer wants something that will hold value, and a used-car buyer wants something that has lost its value,” Bailey says. “The price of any car is what it costs to keep it on the road.”
For a no-cost estimate of what your vehicle is worth, and future values for new and used vehicles, visit Canadian Black Book.