Score a Great Deal on a Used Car by Understanding Depreciation
If you understand depreciation, you'll understand how two similar vehicles end up costing vastly different prices.
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Finding a great deal on a used vehicle requires strategy. You can spend hours scouring local dealerships or online used-car listings, and with a bit of finagling, you might negotiate a bargain price. But empowering yourself with insight on car depreciation and how it affects the cost of a pre-owned vehicle can ensure that you maximize the amount of car, truck, or SUV you get for your money.
What is depreciation? In a nutshell, it’s the value that a vehicle loses with time and use. With rare exceptions for collectible cars, most new vehicles begin to depreciate the minute they are driven off a dealership lot. Those vehicles usually continue to lose value until they hit a price floor when they’re worth more as scrap metal than as transportation.
Here’s the key to using depreciation to your advantage: Not all vehicles depreciate at the same rate. Consider two compact SUVs from different brands: Both offer similar features and sell for $40,000 when new, yet three years later, with the same mileage and in similar condition, they might sell as used vehicles with thousands of dollars difference between their prices. A vehicle with high depreciation eventually becomes a cheaper used vehicle.
When new, these two cars were valued the same, yet now buyers and sellers seem to think one is worth more. What changed? In some cases, a vehicle’s long-term reliability or lack thereof drives how slowly or quickly it depreciates. In other cases, the price difference largely amounts to perception. Is the vehicle cool, or in demand, or hard to find? These cars will likely have low depreciation, and finding a deal will be harder. Has the styling aged poorly, or is the technology behind what its peers offered? These may drive down the price of the car without impacting its value to you, depending on your priorities.
Now comes the hard part of using depreciation as a bargain-hunting tactic: Finding data on depreciation for specific models can be challenging. It’s much easier to find vehicles with low depreciation (often referred to by the flip side of the same coin with the term “high residual value”). You can perform an internet search to find vehicles and brands with the highest residual values, which you should steer clear of if you’re looking for the best possible deal and assuming you will own this vehicle for several years. The following tips will help you sort out vehicles that may have high depreciation and offer a better opportunity as a used-car bargain.
Look at Lease Prices
When you lease, your monthly payments cover the depreciation (plus profit for the dealer and automaker) while you drive a car. If you scan advertised deals, you’ll find that some brands regularly charge higher lease prices than their competitors. A high lease price compared to vehicles in the same class is one clue that a used version of the same model may have high depreciation. The customer who leases that vehicle when new is, in essence, paying more to lower the price by a bigger margin for the whoever buys the car as a used vehicle.
Pay Attention to the Rental Lots
The next time you’re picking up a rental car at the airport, scan the lot and make a mental note of the most common vehicles. Rental companies buy cars at steep discounts, and automakers tend to unload their less popular models on these bulk buyers. When rental companies sell off their fleets, they flood the market with these models, all but guaranteeing there’s more supply than demand. This drives down the prices of all examples of a given model, even those bought by individuals at full price.
Luxury Loses Value Fast
As a general rule and speaking in percentages (rather than dollar figures), luxury cars tend to depreciate quicker than mainstream brands. At a certain point in the depreciation curve, it’s not uncommon for a used luxury car to be worth less than a similarly aged car from a proletarian brand.
“Luxury buyers want to be seen in the latest version of their preferred model, but that status fades quickly after a luxury vehicle drives off the lot, drastically reducing these models’ value on the secondary market,” says iSeeCars Executive Analyst Karl Brauer. “The price has to significantly drop to make these vehicles desirable to used car shoppers to compensate for their high operating costs and outdated technology.”
Just be aware that maintenance and repair prices can be significantly higher with a luxury vehicle than they are with mainstream brands, especially if you plan to service the vehicle at the dealership.
Sales Volume Skews Things
Sometimes popularity means there is immense demand for a vehicle that will persist for years. Other times it guarantees that the used-car market will be oversaturated with off-lease and three- to five-year-old cars. Consider full-size pickup trucks. In 2016, the Ram 1500 outsold the Toyota Tundra four-to-one. The ample supply of used Rams is one of the factors that drives the price down quicker than a used Tundra. A 2016 Ram 1500 loses 35.2% of its value over five years, according to the automotive research firm, iSeeCars. By comparison, a comparable 2016 Toyota Tundra pickup has a lower average five-year depreciation rate of 19.5%.
Reputation Matters
The Tundra’s high resale prices are helped by Toyota’s sterling reputation for quality. Of course, you don’t want to buy a vehicle that’s going to break down on you, regardless of price. In this case, you need to determine if a vehicle’s depreciation is driven because of actual low quality, or merely because of perception. Hyundai and Kia make consistently reliable vehicles, yet they don’t enjoy the same image as Toyota or Honda.
Vehicles with unique features, styling, or capabilities that increase their desirability naturally have higher prices on the used market. For example, the Jeep Wrangler has the lowest five-year depreciation of any 2016 model year vehicle at 9.2%, notes Nick Woolard, lead analyst for the consumer car insight source, TrueCar.
Depreciation During the Chip Shortage
In normal times, most cars will be worth less than its original value when it’s resold as a used vehicle, even if it only has few hundred miles on the odometer. But we’re not living in normal times. Due to supply-chain hiccups and a shortage of semiconductors chips, demand for cars—both pre-owned and new—currently outstrips supply. This has driven prices to an all-time high, even though the vehicles continue to age. In fact, in some extreme cases, used vehicles are now worth more than the manufacturer’s suggested price for a factory-fresh version, because new cars are so hard to find.
Still, the basic idea of depreciation still holds true. Vehicles that previously lost value quickly are still going to offer the best deals even when the car market is in a flux. And once new car production meets demand or exceeds it, used car prices should stabilize or even resume their usual downward trajectory. Nick Woolard, lead analyst for the consumer car insight source, TrueCar, sums it up best. “Things will stabilize, and a lot of that's going to be predicated on new vehicle production coming back in a way that can fulfill the demand that's out there, but It could be relatively near term; it could be long term,” explains Woolard. “But eventually we will be back to an environment where vehicles depreciate, like they historically have.”
