Most Car Buyers Unaware of Vehicle Depreciation Rate
What is the most expensive part of owning a car – gas, maintenance, insurance, financing?
No, according to the AAA’s latest cost of driving study, if you factor all of these costs together they would hardly match the depreciation on your vehicle as it sits in your driveway.
With the exception of a tiny number of highly collectible vehicles, our car is the most expensive asset most of us own that can be guaranteed to lose value. Sure there are risks involved in owning property or stocks, but a vehicle will be worth less the longer we drive it and most of us borrow money for the privilege.
Yet a new study by BuyingAdvice.com shows that over 70 percent of those polled did not know the anticipated vehicle depreciation rate for the model for which they requested a price quote.
The AAA Study puts the average annual cost of depreciation on a new vehicle at $3,392 per year, but there are significant variations depending on the type and model.
One certainty is that the steepest period of depreciation is in the first year of ownership, indeed some would say in the first mile. That is the point at which your “new” vehicle becomes “used” and even if you were to head right back to the dealership, they would quote you the wholesale price to buy back the car that you just paid retail for. Also any fees or sales tax you paid on your vehicle will not be counted toward the value of the vehicle.
Most leading experts put the average first-year depreciation somewhere between 15 and 20 percent of the price of the car. After that a vehicle will lose around 10 percent of its value annually for the next four years though there can be very wide variations among models and everything is dependent on the mileage driven and condition.
The speed of depreciation only becomes important to most of us when we come to sell our car. It is depressing to know that you have been making payments for years only to learn that your car is worth less than the amount you still owe.
“There are an increasing number of no-down payment loans available, but I still advise at least making a down payment that covers the taxes and fees on your new car purchase,” says personal finance expert Claudia Storms of A&S Financial Services.
“The more you can put down the less interest you will pay over the lifetime of the loan and the more flexibility you have if something changes or you simply get bored with the car you are driving,” says Storms.
“If you know you like to change cars every three or four years then you should plan accordingly and limit the length of the loan period to the time you expect to own the car. That way you minimize the interest cost and avoid being upside-down when you come to change cars,” says Storms.
However, the tightening economy is being reflected in an increase in the length of car loans, according to industry statistics, and this will mean car buyers will keep their vehicles longer than they have in the past and pay more interest over the life of the loan.
New research from BuyingAdvice.com shows that car buyers intend to keep their new vehicles longer than they have in the past. While 15 percent of our sample told us they had owned their last car less than three years only 8 percent said that they expected to own their current car less than three years.
Leading industry research group Power Information Network, a division of J.D. Power and Associates, reports that the length of car loans is also increasing. Their figures show loan terms are up from an average of 62 months in 2004 to 64 months in 2006, while down payments, as a percent of transaction price, have declined from 19.3 percent to 16.3 percent over the same period.
Almost ninety percent of respondents to our BuyingAdvice.com said that they expected to pay off their car loan before changing vehicles and almost sixty percent of new car buyers said that they expected to own their new vehicle for over five years.
So it appears that new car buyers will be holding onto their vehicles longer in the years to come and paying an increasing amount of interest rather than increasing their down payments.
The 1500 people surveyed for the study were drawn from the 50,000 people each month who request price quotes from the consumer advice web site, BuyingAdvice.com, and all stated that they were within 30 days of making a new car purchase.