The single most expensive part of car ownership is…

Published October 21, 2015   Posted in How to Save

It is no secret that we Americans tend to spend a whole hell of a lot of money on car ownership.  In fact, one of my first posts on Think Save Retire examined how devastating cars are to our future selves. They strip money out of our pocketbooks in so many ways, but there is one particular way that financially screws us up more than any other.

The most expensive part of new car ownership is not the sticker price!The single most expensive part of owning a new car is: its depreciation!

And it happens instantly.  Literally, the second that you drive your brand new car off the lot, the Depreciation Gods have already stripped value from that slightly-less-valuable machine that you just bought (Remember: I bought a brand new CTS in 2010 – huge mistake).  How much value?  Try more than 10%.

An article on Trusted Choice illustrated just how devastating automotive depreciation can be.

For example, the article looked at a car purchase for just over $31,000, which was the average cost of a new car in 2013.  Once the car is driven off the lot, the car immediately loses 11% of its value on average.  Thus, just a few moments after purchase, the car’s value drops to $27,800.

Just a year later, the car is valued at just 75% of its original purchase price, resulting in a one-year drop of a whopping 25%.  Worse, three years later the car’s value has dropped nearly half.  Now, the car that you forked over $31,000 for is worth around $16,800.

After five years, more than 60% of the car’s value will be lost to depreciation, even if you keep the car well maintained.

Quick facts on depreciation:

  • Depreciation is most severe at the beginning of ownership
  • Cars lose an average of 11% of their value the moment they leave the lot
  • After the first year, many cars lose a quarter of their value
  • Over the first five years, cars can lose as much as 25% of their value each year

Is it ever smart to buy a new car?

Though I would never buy a new car again, depreciation is of little concern if the new car is literally driven into the ground – meaning, you keep the car for as long as it will physically operate, or until the value of the car is at ZERO.  Depreciation hits drivers hardest if they attempt to sell the vehicle when the car still holds value. If you buy a new car, keep it as long as possible to avoid depreciation losses.

But like I said, I’ve made this mistake before and would NEVER buy a new car again unless I had a very compelling reason.  Instead, I’d choose to buy a used car that has already depreciated quite a bit, and then proceed to drive it into the ground.  Nowadays, I prefer to buy my cars at around half of their original value by looking for them used.

What accounts for the rate of depreciation?

In general, cars that are easier to sell tend to depreciate slower than cars that are tougher to sell. That means depreciation on a popular Honda Accord model will be less severe than depreciation on a Jaguar XJ, for example.

But, there are so many variables that determine how rapidly cars lose their value.  This interesting Forbes article compared the depreciation rate between a Chevy Cobalt and a much more expensive BMW M3.  Though the M3 sets drivers back almost $60k and lost over half its value in five years, the Chevy Cobalt retained less than 20% of its original value!

Why?  According to the Forbes article, the Cobalt hasn’t be updated by the manufacturer in a while and fails to draw in buyers the way other cars might. In addition, inexpensive subcompact cars like the Cobalt, Kia Rio and Chrysler Sebring tend to be sold in bulk to car fleets (i.e.: rental car companies), which helps diminish their value more rapidly.  Ironically, car companies that depend on these high-volume fleet sales – such as Chrysler – help their internal sales numbers while at the same time kill the value of their own cars.

Modifications to cars can also affect their value.  Restored cars can fetch quite a bit more than the original purchase price, but uncommon paint jobs or other extreme modifications to cars can often reduce their value to other buyers.

From the Forbes article:

The best way to avoid deprecation is to drive fewer miles, says Ibara. And resist the temptation to detail your car in a way that may not appeal to future owners: Silver cars appeal to most second-hand buyers; a pink car does not.

10 cars that depreciate like a stock market crash

A Popular Mechanics article cited 10 of the worst performing cars from a depreciation standpoint, and the results are interesting.

Which cars faired the worst?  The BMW 7-Series, Bentley Arnage, Range Rover, Cadillac Escalade, Aston Martin DB7, Mercedes Benz S-Class, Maserati Coupe, Audi A8, Jaguar S-Type and Volkswagen Phaeton.

What’s the moral of this story?  The more exotic the car, the greater the depreciation (of course that’s not always true).

Let’s move on to more consumer-class vehicles.

An article published in the Washington Post early this year looked at the top 10 cars with the largest difference in price after just one year of ownership.  Toping the list is the Hyundai Genesis, followed by cars like the Cadillac CTS (that’s mine, dammit!), GMC Yukon, Lincoln MKS and the Jaguar XK.  Is your car on the list?

How to take advantage of automotive depreciation

With all this talk of cars losing value, there is a bright, shiny positive in all of this.  If you are looking for a new car, consider a slightly (gently?) used car instead with the greatest deprecation rate. For example, if you’re looking for a new Hyundai Genesis, consider looking for a one or two year old Genesis instead and pay a third less for the vehicle.

In other words, find used vehicles that have already depreciated.  Remember, the newer the car, the greater the depreciation rate.

How do you find cars with the greatest depreciation rates?  Google is your friend.  Try a search for “2015 highest car depreciation” for results from organizations like Kelley Blue Book, Auto Blog and Bank Rate – and so, so many others (including the Popular Mechanics post I cited earlier).  Browse through these sources to get a feel for which cars tend to make the list more than others.

For example, Top 10 cars to buy used over new, which I stumbled on 2 minutes after diving into one of the search results (all car links will bring you over to the I See Cars blog):

Rank

Vehicle

$ Price Difference over the First Year

% Price Difference over the First Year

1

Hyundai Genesis

-$16.6K

-38.2%

2 (tie)

Smart fortwo

-$6.9K

-36.9%

2 (tie)

Cadillac CTS

-$20.0K

-36.9%

4

Chevrolet Impala

-$10.8K

-33.5%

5

GMC Yukon XL

-$21.1K

-32.8%

6

Volvo S80

-$15.7K

-32.6%

7

Mercedes-Benz S-Class

-$37.6K

-32.4%

8

Lincoln MKS

-$14.6K

-30.4%

9

MINI Cooper

-$9.0K

-29.3%

10

Jaguar XK

-$28.1K

-29.2%

In general, a good rule of thumb when car buying is:

  • If you NEED new, look for cars with the best resale value
  • If you are okay with slightly used, look for cars with the greatest depreciation

And if you just want to blow a bunch of money on a car that you don’t need, do what I did and buy a brand new Cadillac CTS, then look to sell it about six years later.  🙂

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Comments

38 responses to “The single most expensive part of car ownership is…”

  1. Alexandria says:

    Awesome read. Never bought a new car and never will!

  2. I have the same opinion on new cars. They depreciate so much that it turns something that should be an asset into a liability. My approach to this problem has been to drive REALLY old cars that might actually increase in value (but at least won’t decrease anymore). For example, I’ve been driving a 70s Beetle for a few years and not only is it fun to drive but the market value has actually gone up slightly. Of course it doesn’t have any modern features (no AC, and I live in Florida!) and it needs TLC more than a normal car, but I think it’s an attractive alternative to modern car ownership.

    I wrote about it in detail here, if you’re interested: http://engineeringminimalism.com/the-most-minimalist-car/

    • Steve says:

      Very cool, Bryan – gotta admit that I’d look twice if I saw a 70s Beetle rolling down the road. But regarding its lack of features, what you said on your blog is exactly right – the more features it has, the stuff that can break! 🙂

  3. Maggie says:

    Exception : used Subarus in Alaska. When we were looking for a car, we realized Subarus have an initial depreciation off the lot, but then they maintain the same price for nearly ten years up here! (We live in a crazy place)

  4. When I eventually have to buy a car again it will be a used Toyota Camry or Honda Accord for $10k or less CASH. Made that mistake with the CTS before, but I guess at least I bought it used.

    Unless I strike it rich and get a new M6 🙂

    • Steve says:

      Ha! Good call, Fervent. I do admit that the M6s look pretty sweet. I’ve always been partial to the 7-series, too. I don’t think I’ll ever own a BMW, though. Now a Ferrari F-430? Yeah, maybe. 🙂

  5. Doan Duong says:

    Its normal for guy to want to get nice or high performance car, and then proceed to spend a ton of dough we dont have on a depreciated piece of machinery. I make similar mistake, marketing people did their job flawlessly. But the point is the move forward and not make the same mistake again. But we can also still be dreaming of those nice car, just dont take action on it. Unless we win the lottery.

    • Steve says:

      Appreciate your thoughts, Doan. Agreed, the most successful among us aren’t those who never make mistakes, but those who can learn from their mistakes and move on. And, we’re trying to do just that! 🙂

  6. 100% guilty of buying a new car. But I’ve owned it for 5 years, and it only has 24,000 miles on it. It’s like a forever home – I found my forever car! The depreciation factor stings, but I really do plan on driving it until the wheels fall off.

    • Steve says:

      Bingo! Looks like you’re doing it the right way, Penny. Granted that back in 2010 when I bought my brand new CTS, I had no idea that I’d be looking to retire in 6 years and sell the car, but then again, you never really know what your future is going to hold.

      That’s the fun of it all! 🙂

  7. We’ve never bought a new car, but generally that was because of our finances. Of course, I was raised to drive cars into the ground, so depreciation doesn’t bother me. It’s more about how durable a car is. We lucked out last year on a 2012 Civic with cosmetic damage and super low mileage (under 25k). I hope to drive it well over 100k.

    I think the more expensive cars have less resale value/worse depreciation because people spending that kind of cash generally want it customized to their specifications.

    We’ll check out used cars, but if we ever get to the point where we can get my husband his dream car (Challenger), I’m guessing we’ll buy new to make sure his dream car has everything he wants. But like I said, we’ll at least check around to see if we can avoid some of the worst deprecation. Not that I plan on letting him do anything other than drive it into the ground too.

    • Steve says:

      Good luck on the Challenger front, Abigail! I’ve been down the sports car road and the desire to modify the car to make it even faster will eat at him. A louder exhaust here. Spark plugs there. Cold air intake. Supercharger.

      If you do get a Challenger, be ready for it, cause it’ll come! 🙂

  8. NZ Muse says:

    Not for us! We don’t resell, we drive till our cars die. Depreciation is totally irrelevant.

    That said, we’ve never bought a new car.

  9. Freedom40 says:

    Great post! I bought my first new car in 2013 and I think its the only car I’ve ever had a bit of regret about purchasing. It’s nice and all, but it’s only marginally nicer than my old used Mazda that I traded in. Probably the best thing about it is the reliability of driving something new. No maintenance problems is nice! Still, not sure if it is worth it, especially considering that many older cars last longer and longer today. I’m currently debating keeping this car for a long time, or downgrading to something a little simpler…

  10. Marc says:

    I wish I thought about this 2 years ago when my wife and I both bought new cars 🙁 You probably read about my experience in a newer post of mine. We bought them with the intentions of driving them until the wheels fall off but now we’re thinking about moving somewhere where we won’t need cars so now we’re kind of in limbo. It stinks that they’re holding us back from moving sooner but it is what it is and it’s a mistake we’ll never make again. You live and you learn 🙂

    • Steve says:

      Hey Marc – yup, I saw that post and it reminded me of, well, ME! Like you said, we live and learn. Mistakes of the past will stay…of the past! 🙂

  11. Mr. SSC says:

    Great example, when I traded in the Camaro for a more family friendly/better commuting option, we ended up with a Hyundai Genesis. It was less than a year old, but had 7k miles on it from a corporate ownership. The price difference between that one and a zero mile one on the same lot was almost $12k. Ridiculous! Great deal for us as we got a great trade-in value and a huge price break. Otherwise, we would’ve kept looking.
    Like others mentioned, when I got the Camaro, we had no idea we would be starting a family within 2 years, but it still worked great for 3 years with kids.

    • Steve says:

      Awesome, Mr. SSC – looks like you bought the best car possible for depreciation and saved over a third of the original purchase price. Finding a one-year old vehicle can be tough enough, but a Genesis, no less. Good find. 🙂

  12. This brings two thoughts to mind.

    1 – I need to apply my cost of use calculation to see how much my car will cost me per year over a 10 year period (which is how long I plan to hang onto my current car…5 years in so far)

    2 – I don’t think I will buy another NEW car again either. But I will consider buying a used Tesla 🙂 But again that is still another 5 years away before it is even on the table.

    Cheers!

    • Steve says:

      Hey Dominic – yeah, figuring out exactly what our cars are costing us is a very worthwhile number to understand. I’m sure for most of us, that cost is probably a bit higher than we expect.

  13. Jason says:

    This is brilliant. I am going to reference this when I write my post on Jason’s rules for buying a car. #1 rule NEVER BUY A NEW CAR!

  14. When we moved to the mountains, we knew we needed a four-wheel drive, high clearance vehicle, and landed on the Subaru Outback as our car of choice — also known as the official vehicle of mountain towns. Because the Outback is such an in-demand car, we literally could not find a used one worth the price of taking on the miles already on it. For what we could get a new one for (negotiated to way below invoice, of course), we would have had to buy a three-year-old, 60K miles used one, and that was a nonstarter for us. So we bought new. And we plan to keep it as long as it will run. We know we didn’t follow the conventional wisdom on this one, but there is definitely a difference between certain models of car, and a difference by region. In our region, buying a Subaru new made sense, AND we know we’d always be able to do pretty well selling it because they’re in demand — not that we plan to sell! Our Subi will continue to be our skiing and camping vehicle for a good, long time, and we even plan for it to haul our eventual R-Pod. 🙂

    How’s that for a long way of saying: We completely agree with you, except in those rare instances when a model’s resale value makes its depreciation minimal, and makes buying new a better deal!

  15. […] relationship expensive cars.  If you see someone pulling out of their 3000-sqft house in their brand new Chevy Tahoe or F-150 Raptor, I’m talking about those people.  But it does not stop there.  […]

  16. Rachel Finn says:

    When I first realized how much cars can depreciate just by driving them off the lot after purchase, I was amazed! I decided that I’d never buy a car brand new because of that. I have had some good success in buying cars that are just a few years old, especially when I find them for a good deal. I appreciate the list of cars that depreciate the fastest, especially because I might be able to afford one of them if it’s a few years old!

    • Steve says:

      It truly is pretty darn amazing, isn’t it? I might use the word incredible, too. And yup, buying one of those fast-depreciating cars a couple years after they were new is definitely a huge cost-saving measure.

  17. John Smith says:

    Hi, STEVE! Although there are 10 cars that depreciate like a stock market crash, Thanks to your post, now I know how to take advantage of automotive depreciation.

  18. I think it’s less of a kick with my Honda Fit or with toyotas but still, I think that the sweet spot is buying used 3 years old cars… then run them to the ground

    • Steve says:

      Yup, some Toyotas and Hondas hold their value pretty well. But I definitely agree, a 3-year old vehicle strikes a good balance between reliability and already-realized depreciation. I’d say that’s a darn good policy to follow.

  19. Autozik says:

    Hello, Thanks for your sharing. I agree to your opinion that the single most expensive part of owning a new car is its depreciation!

  20. Factor in the cost of parking, and you’d get a radically different answer.

    This is a silly headline. How’re you supposed to live in WY without a car? But distances are vast, and housing and land costs reflect that. In DC or NYC or San Francisco, by contrast, choosing not to own a car (especially for people without children) is a real option.

  21. McKenzie says:

    I like how you point out that you can use depreciation to your advantage. In my eyes, I am not sure of the reason to buy a new car when you can find ones that aren’t that old! Thanks for sharing this information!

    • Steve says:

      Thanks McKenzie – yup, take advantage of someone else who paid for depreciation. There are a ton of gently used cars out there that people unload. It’s ridiculous, actually! 🙂

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