Why New Car Depreciation Isn't as Bad as They Say - Unhaggle
Fuel economy, finance rates and fancy features top the list of concerns for many potential car buyers. However, for some it’s the eventual loss of value – or depreciation – that’s the main concern. The realization that no one but you will pay the same price for this very car again can hit you like a truck.
Depreciation is essentially the difference between the price you pay and the amount you get when you try to trade it in or sell it. Whether you’re buying a new car or a used one, its value will inevitably decrease. The most significant depreciation happens in the first three to four years at an average rate of 15 to 20 per cent a year. Click here to learn more about depreciation and how it affects the value of your car. Because of its inevitability, we believe that depreciation shouldn’t be feared, but embraced instead. Here’s how:
When you purchase a new 80-inch television, the thought of how much it will be worth in a few short years is a small concern, because ultimately it will be worth less than the price you pay for it. After all, it’s only a consumer good that you’ll likely use strictly for pleasure, either by catching the latest football game or
watching a shiver-inducing thriller.
The same attitude should be applied when purchasing a new car. Investing in a new car is more similar to investing in an education, new wardrobe or even time. These investments are made with hopes of adding value and perhaps capital to your life, but they are not made with the same promise that an investment in stocks or real estate provides. If you are looking to invest with a car, invest in adventure by purchasing a Jeep Wrangler. Invest in time spent with your family on road trips in your Toyota RAV4. Invest in decreasing your carbon footprint by purchasing a Toyota Prius. Instead of focusing on the return on investment that your car will never deliver anyway, see how it can enrich your life on a more personal level.
As soon as a new car leaves the dealer lot, it is valued at 11 per cent less, not five kilometers back. New cars depreciate at a rapid rate in the first three to four years, most significantly in year one. The primary reason for this is that the car is no longer new. When you go to sell this car, the pool of purchasers is narrowed to dealerships — who will not pay more than the lowest price they can potentially get that car for elsewhere. Your other potential purchasers are used car buyers — who will likely refuse to pay the inflated price you may ask for.
However, this does not mean that a used car that has already suffered its first-year value blow is a better choice. For starters, assuming you take a one-year-old model, you are saving only the 17 per cent you would have lost if you bought it new. The used car is only mildly used, but it has kilometers on it, a year of warranty is gone, and its value will continue to drop. At the very least, the depreciation premium, which is the 17-per cent loss suffered in the first year of owning a new car, buys you a peace of mind. You are guaranteed new parts, a full warranty, perfect maintenance and a clean vehicle history. While there are resources available that allow access to vehicle history, nothing is as trustworthy or accurate as the knowledge that you are the first person to drive that car. This kind of comfort is priceless.
There are a few instances when you are looking at cars to buy where depreciation doesn’t matter or may be less relevant. When you purchase a new car with the intention of driving it into the ground (however long that may take), the concern of depreciation in value is irrelevant. There is no need to worry about the value of the car if you never intend to sell it in the first place. Another instance is if you plan on driving past your term of finance. If the car is paid off and you continue to drive it free of monthly payments, the money you are saving on payments will be earned back in depreciation. The rate of deprecation lessens significantly over time, with the residual value usually balancing around 40 per cent. Manufacturer rebates and dealer discounts are another way to save big on depreciation. Since deprecation starts at the MSRP (Manufacturer Suggested Retail Price), not the actual price you pay, you can actually avoid the dreaded first year of depreciation altogether. You just need to cut 15 per cent off the MSRP, which you can do by haggling with the dealer.
With that being said, there will always be cases when depreciation does matter and being aware of those is important. If you intend to have a very short-term purchase of three years or less, you will encounter disproportionate depreciation for little monetary value over the short-term. If you intend to keep your vehicle for a short time (three years or less), a better option would be to lease a new car. Taking on low down-payment financing can also be risky when it comes to depreciation. If your borrowing amount is high when you drive off the lot, you may have something called an upside-down loan – a loan that is higher than the worth of the vehicle. This can be problematic if you encounter a situation where you were to crash your car before balancing out your loan. The issue, however, can be managed through insurance companies that offer gap insurance by protecting your loan margin.
It should be clearer by now what depreciation is and more importantly why new car buyers should not fear it, but rather embrace it. Part of embracing it can mean learning how to manage it. Slowing down depreciation can be done before a new car is even purchased right through to the years after the finance loan has been paid off. The following are some quick suggestions on how to do this:
1. Choose a workhorse car brand that is known to depreciate in value at a slower rate
(Japanese brands such as Toyota and Honda often top this list)
2. Investigate which car features, such as colour, are popular in used vehicles and add those into your new car purchase to bump up its resale value
3. Purchase your new car as far below the MSRP as possible to balance out that steep first year depreciation percentage
4. Complete regularly-scheduled maintenance and keep all service records
How to Calculate Depreciation of Car for Business Use
Depreciation is the book-keepers' way to account for asset usage. That is, it is a way for businesses to account for the wear and tear on an asset over time. It is also a better way to match revenues with expenses, an important accounting quality standard. Depreciation on a car is calculated in the same way as most other assets, and the Internal Revenue Service (IRS) provides guidance on the best methodology to use from their perspective.
Determine that portion of the car usage is for business vs. personal. Only the business portion of the car can be depreciated on your tax return. For example, if you use your car 70 per cent for personal use, depreciation can be claimed on 30 per cent of the cost.
Use the Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation. While there are several other depreciation methods, this is the one the IRS advises. You will need to know the original cost of the car, and the life of the car (how long can you use it). This will allow you to look up the rate to depreciate your car. Tables are located in Publication 946, How to Depreciate Property.
Multiply the value of the car by the depreciation rate given to you by the MACRS chart. Let's say you purchased a used car for £3,250. You think you can get a good three years of usage out of it. According to MACRS the yearly depreciation percentages are: 33.33 per cent, 44.45 per cent, 14.81 per cent and 7.41 per cent, respectively. There are 4 percentages in case you begin depreciation in the middle of the first year.
Begin with year 1 for 33.33. Multiply this by the cost of the car ($5,000). Year 1 depreciation is £1,083.20 ($5,000 x .3333). Year 2 depreciation is £963.10 (($5,000 - £1,083.20) x .4445). Continue this process with the depreciation expense for Year 3 and 4 until the car is completely written off.
HERE is a list of the top ten cars that will retain more than 50 per cent of their value after 36 months.
Top ten cars of 2017 that depreciate the slowest
It seems almost counter intuitive when buying a car to think about how much money you are going to lose on it.
However, motorists should be clued up about depreciation value when purchasing their next vehicle.
Choosing the wrong car or a car that depreciates quickly could see you loose thousands and make it harder to flog.
Top 10 cars that depreciate the slowest in 2017 [PH]
WhatCar? has compiled a list of ten 2017 cars that depreciate the slowest.
Each calculation is based on 12,000 miles a year over three years.
Here are the top 10 cars that depreciate the slowest in 2017 over a three year period:
Porsche Macan: 56.26 per cent value retention
Depreciation after three years - £24,700 (56.26 per cent retention)
Porsche Macan is one of the best luxury SUVs on the market. It’s fast well kitted out and spacious.
It’s an expensive car but one that holds its value, so although you have the large upfront fee, you will retain almost 60 per cent of it.
Range Rover Evoque 2.0 eD4 SE: 56.37 per cent value retention
Depreciation after three years: £17,250 (56.37 per cent retention)
It’s a lot cheaper than the Porsche and a car that is still in very high demand.
Range Rover’s cheapest model will retain 56 per cent of its value after three years.
This is the cheapest and most economical way to get a Range Rover badge on your driveway.
Range Rover Sport SDV6 HSE:56.38 per cent value retention
Depreciation after three years: £36,450 (56.38 per cent retention)
If however you have a bit more cash to burn, you can opt for the Sport SVD6 HSE.
The Sport retains 0.01 per cent more of its value than the Evoque but offers moe space, luxury and a better drive.
You also benefit from two more seats than the Evoque.
BMW X4 xDrive20d SE -56.41 per cent value retention
Depreciation after three years: £21,400 (56.41 per cent retention)
The BMW X4 expertly balances SUV practicality with coupe looks.
It’s well kitted out too with an iDrive infotainment system, sat nav, heated leather seats and all-round parking sensors.
Audi Q3 2.0 TDI 150 S line: 57.23 value retention
Depreciation after three years: £17,850 (57.23 retention)
The Audi Q3 retains its value bette than any other premium small SUV, making it a very worthy option.
Its interior excels in typical Audi fashion and its ride is smooth and comfortable.
Tesla Model S 75: 57.23 per cent value retention
Depreciation after three years: £36,341 (57.23 per cent retention)
The groundbreaking electric car company’s flagship Model S retains much of its value over three years.
It is the vehicle that made electric cars cool and desirable thank to its good looks and phenomenal speed.
While the cost price is expensive, the car retains most of that value and is economical to run.
Dacia Duster 1.6 SCe Ambience: 58.28 per cent value retention
Depreciation after three years: £6,175 (58.28 per cent retention)
Dacia is renowned for their good value cars and the Duster will also hold on to most of that too.
Critics praised the no-nonsense SUV that costs the same as a small hatchback but much more room.
It’s a hard car not to like and its competitive price make it all the more desirable.
Land Rover Discovery 2017 first look [LAND ROVER]
Depreciation after three years: £30,150 (59.12 per cent retention)
The third Jaguar Land rover car on the list is the 3.0-litre Discovery.
The outgoing model is still just as desirable as the newer one and shares a lot of the same features.
Audi S3 hatch 2.0 TFSI Black Edition: 64.1 per cent value retention
Depreciation after three years: £23,800 (64.1 per cent retention)
Audi’s hot hatchback is a desirable family hatch which also produces 306bhp.
The reliable German hatch is sporty and exciting, stylish, has a beautiful interior and is reasonable practical.
Lotus Elise 1.8 Convertible: 64.1 per cent value retention
Depreciation after three years: £23,800 (64.1 per cent retention)
Topping the list, almost surprisingly is the 1.8-litre Elise Convertible, a super light sports car.
For a sports car it’s also pretty cheap and is bags of fun to drive.
Certainly the least practical car on the list but with the car’s low depreciation it could be worth the risk.