Next to a home, a car is one of the largest investments you will make. It is well known that the minute a new car leaves the sales lot it depreciates in value. What you may not realize is that depreciation is the single largest cost in owning a car. Over a five-year period, depreciation accounts for roughly 48% of your car's total cost of ownership (TCO). When consumers are researching cars, depreciation isn't usually a factor. This is unfortunate since depreciation can be as much as 20% the instant you leave the sales lot.
What Is Depreciation?
Depreciation is defined as the decrease in value of an asset by the length of its useful life. That useful life, and therefore it's deprecation, is affected by factors such as the original purchase price, sales tax, gas prices, automotive loan interest rates, insurance premiums, maintenance and repairs, and automaker reputation.
Determining the depreciation of a car isn't easy. You must do research on the model you are considering. First, determine the new car price for that model. Next, look at the price of used models. You must also factor in the residual value of the used vehicle to get an accurate picture of its depreciation. Banks use the average figure of 16.5% depreciation per year. The residual value would be what the car is worth after the depreciation is subtracted. There are multiple lists published by car guides, auto magazines and consumer reporting groups of cars that depreciate the least.
The Fit is one of Honda's newest entries in the sub-compact market, and it is already winning followers. Honda offers several variations of the Fit, including a standard model, sport model and sport with navigation model. You can choose either the manual or automatic transmission. It comes standard with side-curtain airbags, ABS brakes and power windows. The Fit was named a top safety pick by the IIHS. With a manufacturer's suggested retail price (MSRP) between $15,325 and $16,860, it gets 33 mpg/hwy and 27 mpg/city. The Fit's residual value after five years is approximately $9,200.
The MINI Cooper car has a loyal following and offers buyers a good return on investment (ROI). Described as 'peppy,' the MINI Cooper has only experienced a 40% depreciation overall in five years. Priced just below $20,000 ($19,400) for the basic model, it has four-star rollover safety ratings and front and side airbags. Traction control is standard. The 're-introduced' MINI Cooper debuted in the U.S. in the 2002 model year. The 2002 model is still selling for around $7,000.
Honda has more vehicles near the top of lists provided by automotive guides than any other automaker. Its consistent reliability over the years has made it a sought after brand. The Civic offers buyers many different model options including four coupe styles (DX, EX, EX-L and LX) and seven sedan styles (Natural Gas, Natural Gas and Navigation, DX, EX, EX-L, HF, and LX). A basic model with a sticker price starting at $15,600 will get you a front-wheel-drive coupe with manual transmission that is rated at 26 mpg/city and 36 mpg/hwy. Driver air bags, side air bags and side head air bags earned a five-star safety rating for the Civic. A five-year-old Civic Coupe goes for $8,000. Even a 10-year-old 2003 model will fetch around $5,800.
The Acura TL was a 'top recommended current buy' from NADAGuides. With 29 mpg/hwy and 23 mpg/city, this entry from Acura has a very loyal consumer following. The Acura total luxury care package, 305 horsepower, a four-star safety rating and a retail price starting at $32,750 make the Acura an attractive buy that holds value. After five years, the Acura TL can still command $17,500. After 10 years, the Acura TL goes for $7,500 on average.
Toyota and Nissan also offer several nameplates that depreciate slowly. Japanese automakers have long been seen as offering superior reliability and quality over domestic brands, and recent recall issues for Toyota seem to have done little to tarnish the perceived value of Japanese vehicles in the minds of today's car buyers.
The Bottom Line
No automotive expert can predict with complete accuracy the depreciation of a particular vehicle. You shouldn't purchase a car solely on the assumption that it won't depreciate as much as another. Unless you purchase a car you enjoy driving, you will hate that car. This is true even if it does hold its value. Many factors such as the economy, fuel prices and the care given to a car can alter its depreciation value. If you want to keep the depreciation of your vehicle at a minimum, take good care of your vehicle and sell it before the mileage gets too high. You should also factor in how long you plan on using the vehicle. If you plan on driving it until it can't be driven any more, depreciation won't matter. If you're planning on driving it for a few years and then buying another vehicle, make sure you know what the vehicle's worth will be down the road. Sometimes, buying a used vehicle will be best for that situation, but make sure the used vehicles you look at are worth the price.