Thinking of buying a new car? Wonder if leasing a new car is better than buying a new car? Wondering if buying that car is really worth it? Well you’ve come to the right place. If you are considering buying a new car then think again. Let me share with you the secrets of why buying a new car isn’t all that great.
You’ve heard it before so let me tell you it again: new cars depreciate in value the moment you drive them off the lot. It’s estimated that cars depreciate in value upwards of 10% to 20% the moment you drive them off the lot. Think about that for a second: if you were to purchase a car for $30,000 then it’s value decreases by at least $3,000 the moment you drive it off the lot.
Why is this the case? Well your car is now considered a used vehicle so it will be worth considerably less. Think that’s bad? Well your car will lose an additional 40%-50% over the next 3 years. By year 5 you will lose an estimated 65%-85% of the cars value.
By no means am I telling you not to buy a car at all because let’s be honest – you probably need to drive something. But consider the fact that new cars will lose a considerable amount of value within the first 2 to 3 years of ownership.
What Impacts Depreciation?
There are several factors that lead to increased depreciation vs. a sustained value over the life of the vehicle. Three of the most common factors that reduce the value of a new car are as follows:
- Condition of the vehicle
- Number of miles
- Make and model of the vehicle
Let’s face facts: some cars just depreciate in value more than other cars. For example, a BMW will hold it’s value more than a Jaguar. Does this mean that a BMW is a better car than a Jaguar? Not necessarily. But the BMW will nonetheless hold it’s value in the long run.
The specs of a vehicle play a huge role in determining the depreciated value of a vehicle as well. If a car is a luxury car with all the bells and whistles then it will retain its value more than a car with fewer options. The engine plays a big role too in the estimated fair value of a car as more powerful engines help to retain a cars value over the long run.
What About Leasing
Although you won’t have to worry about losing money on a trade-in, you’ll still end up paying the bulk of the depreciation on a new lease. Essentially, lease payments are equivalent to the depreciated value of the vehicle over the life of the lease. So if you are getting into a 3 year lease then odds are you’ll be paying 40% to 50% of the car’s value with nothing to show for it at the end of the lease term.
If you want to drive a brand new car every three years and don’t care about paying the high price tag, by all means a new lease might be right for you. However, if you wanted to drive the car of your dreams without breaking the bank then there is a better way.
The Goldilocks Zone of Depreciation
Believe it or not there is a way to drive an $80,000 car for half the cost. How you might ask? Well it’s actually quite simple. Remember what I said about new cars depreciating upwards of 50% in the first 3 years? Well why not let someone else pay off half the car for you and then drive it when they are done?
That’s where the Goldilocks zone of depreciation comes into play. After the first 3 years of depreciation the car’s value will level off based on the car’s make and model, mileage, specs and general condition. Typically, the first 50% the car’s depreciated value has nothing to do with mileage but has everything to do with it being a used car. So buying a 3-year-old car with low mileage in great condition can be as low as half of its original MSRP.
Most of these higher end cars are leased and don’t have much mileage on them anyway. For the most part they have regular maintenance and are kept in great condition. It’s typical to find a 2- to 3-year-old car with less than 20,000 miles especially for some higher end cars that aren’t used as daily commuters.
Matching Principal Payments With Depreciation
Another great aspect about buying a slightly used car is that the principal payments will generally match the decrease in the car’s value. What does this mean? Well essentially if your principal payments match the depreciation year after year then you’ll never ‘lose’ money on a trade-in. If you wanted to swap the car in for another car 3 years later than you can easily pay off the remainder of the loan and maybe have some money left over.
Still thinking of buying that new car? If so then that’s totally fine, especially if you are expecting to drive the car until the wheels fall off. But if you are looking to drive a high-end vehicle for low-end prices then buying a lightly used car is the way to go.
Don’t believe me? Simply lookup a car you’d love to drive but can’t afford (within reason please…). If the 2018 version of the car is $80,000 then odds are you can find that same car for around $45,000 to $50,000 in a 2015 model.
Fair Warning: With buying any used car there are always trade-offs. The older model cars will need more maintenance and might require major repairs if they are considerably old. Three years is a good range between a car being a little old and basically brand new. Use your best judgement and do plenty of research before making any major purchases. For more information, check out this article. Good luck!