How to avoid buying a first car with severe depreciation

Jan 25th 2017 at 2:21PM

Buying a first car brings feelings of pride, freedom and accomplishment, but also an aspect of financial concern because your first car is likely one of the biggest purchases you've made so far in your life. From a purely financial perspective cars are a poor investment; they decline in value over time, or depreciate, so when you resell them they're often worth substantially less. But with a little research and strategic borrowing, you can minimize the impact of depreciation on your overall investment.

Buy a slightly older car
The easiest way to avoid the worst years of depreciation for a car is to buy a used car that's a couple of years old. According to Edmunds, the average new car loses 11 percent of its value when you drive it off the lot. That means if you buy a new car for $30,000, by the time you get home your car has lost $3,300 of value. If you still want a newer car, consider one that is a year or two old, suggests Edmunds. You miss out on the steepest decline in value over the first year, but you still have several years where the car will be covered by the initial warranty and before significant maintenance is needed.

Avoid second dip in value
Just buying used won't immunize you from all depreciation. In fact, though not as drastic as the initial depreciation shock there is another decline in value for most cars around year six because that's when the cars start to hit approximately 60,000 miles. If you buy a six-year-old used car thinking the worst of the depreciation is done, you could be in for a surprise. On the bright side, however, you've likely spent a lot less on a six-year old car than a brand new car, so you have less total cost to be impacted by depreciation.

Research resale values
If depreciation is a major concern for you, research the historical resale values of the cars you're considering. Just like investing in stocks, past performance isn't a guarantee that your car will depreciate less than the average car, but it's a reasonably good indicator of how cars from the same manufacturer have fared in the resale market. In addition, there are companies that study the total cost to own each make and model of car, including depreciation, and provide reports for consumers. Two examples are Kelley Blue Book and Consumer Reports.

Take care of your car
According to Edmunds, the biggest factor in a used car's resale value is its condition, which is good news because it's something that's in your control. If you keep your interior in good shape, avoid nicks, scratches and dings, and do a little extra cleaning when you're ready to sell you'll find your efforts rewarded in the resale value.

Consider your ownership horizon
Yes, losing 11 percent the minute you drive home from the dealer sounds like a bad investment. However, remember that depreciation really only matters when you want to resell your car. If you plan to drive the car until the wheels fall off, depreciation is a negligible consideration because you're not planning to resell it. In addition, there are no guarantees in the used car market. You could find yourself trying to sell your car in a flooded market and have to settle for less than you wanted. Or, even if you buy a car that historically has depreciated, if you keep it in great shape and sell in a seller's market you could end up securing a good price.

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