A close look at car depreciation
(This is the first post of the 8-part series An investing-friendly car buying guide.)
Let us look into car depreciation more closely. Depreciation, as we all know, means gradual decline of the value of your car as time passes, due mostly to wear and tear. New car dealers do not want to talk about it, and new car buyers certainly do not want to think about it. On the other hand, those of you who want to buy a used car can get good benefit out of it.
The picture below shows how the purchase price of a car depreciates as it gets older, from the time the car rolled out of the factory till 
when it is 10 years old. (I used Money-zine calculator to make this graph.) The dark blue line gives a low rate of depreciation, as you would expect with a reliable car such as a Honda Accord or a Toyota Camry. The red line shows a high depreciation rate, for example with a Ford Taurus or a Hyundai Sonata. The graph assumes that the purchase price of the new car is $22,000, which is typical for a mid-sized family sedan without any luxury feature.
In the first year itself, the price falls an astonishing 18-28%. In fact, as soon as the car is driven out of the dealership lot, its retail price (what you paid the dealer) drops to the wholesale price (what the dealer would pay you to take the car back) – the substantial dealer fees and any licensing fee and tax that you paid are already lost. After only five years, the car is down to half its original price, and can even lose 70% of its value. And by the 10th year, you can buy it for as low as $2000 to $6000.
Is there a lesson here? You bet. What it tells us is that, instead of paying $22,000 for a new car, if we choose one that is only 1-year old, we get practically the same car for $4000 or even $6000 less! At 5 years age, the car is available for under $10,000. That is a saving of $12,000 which, if invested at a gettable 8% per year (compounded), will grow to over $17,600 in the next 5 years.
Of course, depreciation alone may not settle the issue in favor of a used car (after all, a new car is a new car is a new car). So, read on to why you should buy a used car »
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(Nov 10, 2011 at 5:39 am)
A new car might be foolish to buy, and this graph is great but there is no price when it comes to the need to attract beautiful women. What are you going to do, pull up and ask out a hot girl out on a date in your reliable but old 1992 Toyota Corolla? When you tell her that it will take you A to B, she might point out to a fat girl and say well that girl at least has tits and moves, why not go out with that low maintenace girl there instead?
(Jan 05, 2012 at 12:17 pm)
typical mislead youth. Would you rather look rich on what you spent a ton of money on or would you rather be rich? After all when you have a expensive car, the notion is they have a lot of money. I always say they HAD a lot of money! The car you drive does not indicate how much money you have. My friend has 10 million in the bank and drives a 5 year old Camry, does that mean he’s poor? No, he is smart with his money and thats why he’s rich. Thinking will get it done. The poor men will be self conscious with looks.
(Nov 22, 2011 at 6:18 pm)
Great article. I’m convinced the data-driven approach to buying cars will help buyers save money.
I think you might be interested in the new website that I’ve built, http://carpricegraph.com. It shows graphs of used car prices, which indicate the year-over-year depreciation, similar to that which you analyze in this article.
I’ve been working on the site since April, and I recently finished a new version that has an interesting new feature: comparative graphs of used car prices, like this example: http://carpricegraph.com/seattle/ford
It is my hope that CarPriceGraph will help both buyers and sellers find accurate prices for their used cars.
(Dec 22, 2011 at 11:44 pm)
Hmm it appears like your site ate my first comment (it was extremely long) so I guess I’ll just sum it up what I wrote and say, I’m thoroughly enjoying your blog. I too am an aspiring blog writer but I’m still new to the whole thing. Do you have any helpful hints for novice blog writers? I’d genuinely appreciate it.
(Dec 27, 2011 at 6:23 pm)
First of all I would like to say great blog! I had a quick question which I’d like to ask if you do not mind. I was interested to find out how you center yourself and clear your mind before writing. I’ve had a tough time clearing my mind in getting my ideas out. I do enjoy writing however it just seems like the first 10 to 15 minutes are usually wasted simply just trying to figure out how to begin. Any recommendations or tips? Cheers!