Why Cars Depreciate in Value

December 3rd, 2019 by

Depreciation of brand new vehicles are often a tough aspect for prospective car owners to keep in mind. When buying a car or simply maintaining your current one, it seems that there are more immediate concerns to worry about. Concerns like insurance, that clicking noise coming from the engine, the fact that it’s running at a bit of a high temperature, and the price of gas which is continually rising.

But car depreciation is an essential aspect to keep in mind, as it’s always there. No matter how well you are looking after your car, it will continually drop in value as long as you own it. Unfortunately, the return on investment in vehicles is notoriously bad due to the rate of depreciation. But, what is depreciation, why does it happen, and how can you minimize it?

What is depreciation?

In Layman’s terms, car depreciation is the difference between the value of your car from when you bought it to when you sell it.

Unfortunately, as soon as you drive your brand spanking new car onto the road, it can lose up to as much as a quarter of its value. If you’ve ever tried to sell a new car back to the dealership you purchased it from, you’ll know what we’re talking about. 

The amount that the value decreases depends on many factors, such as the make and model. Typically, however, a car will depreciate 15 – 30% within the first year of ownership and about 20% a year from then on.

If, for example, you purchased a new car for $20,000, it will lose between $2,200 and $5,000 as you hit the road. After a year, around 20% more of the value will have dropped, and then after about three years, your car will probably only be worth half of its original value. So after three years, you’d likely look at selling your car for as little as $10,000.

How tax drives depreciation

A primary factor in the rate of depreciation on new vehicles is the sales tax that’s attached to the original price tag. For example, if we’re still talking about the car that you’ve purchased for $20,00, let’s say around $4,000 of that were to be attributed to sales tax. This means that when you bought the car, the actual value of it was, in fact, $16,000.

So, when you try to sell your car again, you already minus the $4,000 worth of sales tax that was initially attached to the vehicle.

Dealership prices

With any industry, there’s going to be a rather large mark on the cost of a product from wholesale to resale. Most new car dealerships will purchase their vehicles from wholesale manufacturers at wholesale prices. So, let’s say that the dealership purchased your car for $12,000 at a wholesale price. They’re going to add on their own fees and costs to the process, raising the cost to $16,000 before tax is added. 

If they are buying brand new cars from $12,000 at the manufacturers straight off the assembly line, then it’s unlikely they are going to even look at matching the price of a second-hand car, even if it’s been well looked after.

How to minimize depreciation

There’s absolutely no way to stop the depreciation of your vehicle, but there are ways to minimize the hit that you take. Here are a few tips:

  1. Try to limit the mileage
  2. Keep your car in good condition, service it on time, and repair damage immediately.
  3. Buy a very new second-hand car to avoid the first year of steep depreciation.
  4. Avoid over the top modifications like spoilers or crazy color jobs.
  5. Sell according to the season for your vehicle.
  6. Buy a popular color car, as it will sell easier.
  7. Research the make and model of many cars to check and compare depreciation rates and invest wisely.
  8. If you’re trying to sell a new car, try to sell your vehicle before the new replacement model makes it into dealerships.

At House of Cars Calgary, we sell nearly-new cars that are well looked after and won’t take the first year of steep depreciation. If you’d like to know more about our services, please feel free to get in touch.

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