How to Make Depreciation Work for You

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Article QuickTakes:

• Flip the script, and find the depreciation sweet spot
• Sidestep the steepest drop in car values
• The longer you drive it, the less depreciation matters

If you’re like most buyers, you want your next car to be better than your last—or at least a better fit for your needs. That means different things to different people, obviously, but in general it’s some combination of spending a little more, tacking on a few luxury and convenience features, or even stepping up from used to new. Just one problem: the value of a new car drops dramatically even before the ink is dry on the paperwork.

In the car-buying world, few words generate more feelings of dread and confusion than “depreciation.”

It conjures images of once-pricey cars taking a nose-dive in value after just a few years. While yes, that can happen, it’s only one part of the story. Depreciation is arguably among the most misunderstood and over-emphasized words in the automotive lexicon.

The not-so-simple truth is there are a few ways to turn the tables on the Debbie Downer of car buying, and that’s when you can actually begin to appreciate depreciation.

WHAT’S THE DEAL WITH DEPRECIATION?

As with most urban legends, depreciation inspires horror stories and wild exaggerations. But there is an underlying truth at its core: Cars lose value quickly. That new car smell has more staying power.

When Kelley Blue Book (KBB) calculated its 2019 Best Resale Value Awards, the best vehicles on the market still suffered a drop of between 30 and 40 percent over the first three years of ownership.
After those first 36 months, though, that steep rate of decline begins to level out somewhat, and that’s when a window of opportunity opens up.

FIND YOUR CAR’S DEPRECIATION SWEET SPOT, AND IT MAY SURPRISE YOU

How can a 2017 Chevy Impala cost more than a 2017 BMW 320i xDrive?

You guessed it: depreciation.

Initially, the fully loaded Impala costs roughly the same: $35,845* for the V6 LTZ 2LZ trim, versus $35,540* for the entry-level Bimmer. That said, when you start to compare the cars’ total cost of ownership over five years—a formula that combines your monthly payment with all other auto-related expenses such as gas, insurance, maintenance, repairs, and yes, the dreaded depreciation—the total cost swings in the BMW’s favor by over $1,300.

At the end of the first five years, the BMW holds its value better, which more than offsets a slightly higher cost of service and repairs, according to IntelliChoice. And if that’s when you’re ready to sell, you will have found the depreciation sweet spot.

OR, YOU CAN JUST LET SOMEONE ELSE TAKE THE DEPRECIATION HIT

It’s actually possible to get the vehicle you want AND the deal you want if you look in the right places. Consider cars just coming in off-lease—they’re typically about three years old with relatively low mileage—which means you can have your proverbial cake and eat it, too.

Let’s take a look at an example. For 2019, Jeep’s Wrangler Unlimited Sport starts at $27,895, and its powertrain warranty (which covers the engine and transmission, among other important bits) is good for up to five years or 60,000 miles. If you were to buy one today, you’d lose over 30 percent of the value after 36 months… and that’s considered very good compared to other vehicles. KBB predicts the Wrangler Unlimited will retain just 70.1 percent of its value three years down the road. The flip side is that if you went looking for a vehicle that already took that 30 percent depreciation hit, you’d be looking at a much more appealing price: $19,554. Assuming it doesn’t have abnormally high mileage, you could buy a three-year-old Wrangler Unlimited with a couple years’ worth of powertrain warranty coverage, and your depreciation hit would be less and less each year.

THE LONGER YOU PLAN TO OWN YOUR CAR, THE LESS DEPRECIATION TRULY MATTERS

The older a vehicle gets, and thus the lower its value becomes, the slower the depreciation. If you tend to drive the same car for a decade or longer, depreciation may be less of a factor to you than if you’re planning on selling or trading it in after a few years.

After the bulk of the depreciation occurs, other factors like long-term reliability and expected maintenance and repair costs creep into the mix.

So keep that in mind if you’re going to play the depreciation game as a buyer.

For example, a 2019 Lexus LS—which costs around $75,000 new—might seem like an attractive bargain for just under $37,500; it typically loses about 50 percent of its value in the first three years. But the longer you plan to own the car, the greater the likelihood you’ll be on the hook for repairs. And for cars in the upper echelon of the luxury market, repairs can be prohibitively expensive.

DON’T LET DEPRECIATION SCARE YOU OFF

No one wants to lose a mint watching their car’s value plummet, but the simple fact is it comes with the territory of car ownership. Rather than letting the fear of depreciation paralyze your decision-making process, dig a little deeper and learn how to play the game. Once you understand it and begin paying attention to which vehicles do and do not tend to hold more of their value over time, you can make depreciation work to your advantage.

*Pricing represents the 2017 model year.