(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 falling of the value of your car as time progresses, 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 10^th 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 »

See related posts:

1. Picking a budget