How Depreciation Can Ruin a Vehicle

Car depreciation is a decrease in value of a purchased car – whether it is new or used. There are several reasons for the decrease, such as age, wear and tear and market conditions.

How Depreciation Works

Basically, once a vehicle is purchased, its owner can only resell it for a lower price. The longer the car owner waits to sell their vehicle, the lower the vehicle’s resale value will be. The only exceptions to the rule are rare or classic models, which can be sold for hundreds or even thousands of dollars at an auction. Depreciation is inevitable, which means that no matter what a car owner does, their car will lose value over time.

Vehicles tend to lose between 15 and 20 per cent of their value each year. So, if a car costs $15,000, then in three years it will be worth about $9,600. In fact, depreciation comes into effect as soon as the purchased vehicle is driven off the dealer lot. One of the reasons for that is the fact that the dealer would not buy a vehicle for the same price they sold it for. Instead, they would pay its wholesale price, which is usually thousands of dollars less than the price of the exact same model on their lot. This loss also includes the amounts paid to cover taxes and additional fees like freight, PDI and so on.

Why Your Car Will Lose Value

Why do cars depreciate? High mileage and poor condition of a vehicle are some of the most common reasons, but factors like geography, climate, colour and even accessories all play their part as well.

Geography: Vehicles in certain geographical areas lose their value faster than others because they are less needed. For instance, your three-year-old pickup truck may cost more in Edmonton, where trucks are widely used, than in a high-density area like Toronto, where people prefer smaller cars.
Climate: A similar principle applies to climate, since some cars are meant for warm locales, while others are better suited for colder places. You wouldn’t want to drive a convertible in Yukon, would you?
Colour: Colours are more like trends, with some shades falling out of fashion faster than others. For instance, colours like yellow, orange or green tend to be less timeless than grey, silver or black. As such, you might have an easier time selling a grey car versus a yellow one.
Accessories: Certain accessories tend to become outdated over time, which makes them lose their value as well. For instance, your stereo may be worth a lot when you first buy it, but three years later, you might have to deduct it from the price of your vehicle.

Taking these factors into account is the first step toward saving money on depreciation. While we would not necessarily recommend moving to another area in order to drive a convertible or forego cars of a certain colour, we suggest that you at least keep these factors in mind.

How to Fight Depreciation

There are several actions that car buyers can take in order to fight depreciation. Usually cars that have a high demand but low supply have better resale values – as do cars that are in good condition. On top of that, certain brands tend to depreciate less than others. Here are some tips…

a. Wait Before Selling, But Not for Long

As cars get older, they begin to lose their value slower. First-year depreciation tends to be the steepest, since a new car loses its value as soon as you drive it off the dealer lot. This means that once you are out of the dealership, the price drops to what the dealer would pay for it if you decide to resell it.

The best way to profit from depreciation is by selling the car after about three years. By then, you will have gotten a decent run out of your vehicle, but without putting on too many miles or wearing it out.

b. Use the Internet

While there is no definitive list of cars that lose their value quickly, there are a few methods that you can rely on to determine how fast a vehicle will depreciate. If a vehicle retains more than 35 per cent of its value after three years, then its depreciation is not overly steep, which makes it worth the cost.

One of the best ways to check how much value the vehicle of your choice will retain is by consulting a resource like Canadian Black Book. Once you’re done filling out all the information, you should see a graph that will show you exactly how much value you will lose in the next few years.

You can also look up lists of cars that have worst and best depreciation on various websites via Google. While Internet sources are not always accurate, you can use them in combination with Canadian Black Book to attain better results.

c. Sell Your Car for the Right Price

Once you finally decide to sell your car, be sure to research its retail price – eBay and Kijiji are good resources for that. Do not attach a price tag that is lower than it is supposed to be. Also be sure to spruce up the car by cleaning and repairing it, because even if it is in excellent condition overall, little blemishes may turn the buyer away.

If you have any additional questions, feel free to contact us at any time or access our free dealer cost report.

Have a Car in Mind? See the latest incentives, rates and rebates now!

Updated on March 26, 2013

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