When you spend a lot of time checking out auto auctions, or considering if you should buy a salvage car, you probably hear a lot of stuff about depreciation – even if you don’t realize it. Have you ever heard a dealer saying something like, “This car loses all its value the second it drives off the lot.”? Or maybe you’ve heard an eager seller say, “This model holds on to its value!” Both of these examples are referring to depreciation, something that all cars do over time.
What Is Depreciation?
Whether you plan to buy a salvage car or to look for a great deal on a gently used vehicle to resell, depreciation is something you need to understand. The simple explanation of depreciation is that is means that a car loses its value the longer it exists. But the truth is that depreciation is a lot more complex than that, with a lot of factors affecting how and why a car depreciates.
How Cars Depreciate
Let’s say you are just looking at buying a decent used car for sale at auction. You can count on a car losing 10% of its value the second it is driven off the lot brand new. Then you can count on another 25% off the value for every year during the first five years that the car is being used. By the time you get to the fifth year, the car has dropped to less than 45% of its original value. That’s for a good car in a top brand that hasn’t been damaged or had a ton of miles put on it.
Additionally, supply can affect depreciation. If there is a surplus of that exact make and model in your area, the car will depreciate even faster. Even the color of the car can make a difference – neutral colored cars depreciate slower than bright or neon colored cars. Once you start adding in damage, having multiple owners, having high mileage, and all the other factors that affect depreciation, you can see how cars can lose their value very fast.
Why It Matters
Maybe you only come to auctions to buy salvage cars, or you don’t necessarily care what a car used to be worth. That’s fine! But for the savvy shopper, this knowledge can help you keep an eye out for the right type of car. If you don’t think you’ll be selling it right away, look for cars that have the best chance of hanging on to their value.
Cars that are less than five years old, for example, are steals at auctions, because they haven’t yet dropped to dismal levels of depreciation. Pay attention to cars from top brands that aren’t as popular in your area, but still meet the needs of your target market. Finally, watch for cars that are very clean in appearance – even the smallest scratch lowers the value.