4 Factors of New Car Depreciation (And Why I ONLY Buy Used)
A lot of consumers today do not comprehend how the new and used car markets work and because of this, they usually fall into the large majority of car buyers who believe that buying new is better than used.
Most people have a pre-conceived notion that used cars are less reliable, come with unforeseen headaches, or less than immaculate condition.
This is entirely not true if done right. The used car market has remained the only way I’ve bought cars over the last decade. I’ve put together this article to showcase how new car depreciation works and why it makes sense to only buy used (especially with my car buying strategies).
Why is a New Car Considered Used?
Anytime a brand new car has been registered under someone as a primary owner before you do is when a new car is officially considered used. Now the original buyer can sell this car almost immediately if the buyer realizes they’re in over their heads, or after a few years of personal enjoyment when they feel like its time to switch it up.
Just because a car is used does not always mean it has been abused or known to be full of mechanical issues. Problems can and will arise and it can happen the next day of ownership or months later. It’s a risk you have to consider when buying used but there are ways to protect yourself which we’ll cover later.
Used cars are not always ‘old’ and can even still be in production under the same generation. In many cases, especially with our strategies, these are the latest model cars right before new generational rolls out or is debuted.
As more time passes by, more and more cars flood the market which drives the price down.
Times have changed but this is way more apparent in the exotic car world as prices have come down and inventory has never been higher.
Those who have the money and/or connection become opportunists and buy exotics with the intention of flipping for profit immediately. These ‘used’ exotic cars then flood the market but can have as low as just delivery miles on them. The wealthy individuals who do not want to wait will always pay a premium to be the first on the block with the newest car.
This is why you can never walk into a Ferrari or Lamborghini dealer and buy a new car. All cars are custom built to order for a customer before arrival.
What Affects Used Car Pricing?
There are certain things you must know to understand how the market functions. The moment a car leaves a lot, it is officially a used car and is immediately worth less than new. It is not uncommon to lose as much as 20% of your new car value without even adding a single mile on it.
The four reasons below are the after affects of purchasing your new car and how it affects your used car price.
- Dealer Rebates: Whenever new models come out that are slight improvements over the previous model year, dealers will offer incentives and rebates on older models still remaining on the lot.
For example, if you buy a new 2014 Mercedes CLS550 for $75k, you will have the nicest car in the neighborhood and everyone will admire it. A year later, the 2015 CLS models are coming in and they are greatly improved over the previous year. Dealers must now liquidate all 2014 inventory that is already depreciated by being one year older and because dealers will offer incentives that are backed by the manufacturer such as 0% financing or cash rebates up to $20k.
Another person can walk in the dealership and buy the same 2014 CLS550 for a $20k discount, meaning your new car is now worth $55k. In the span of one year, you have lost at least 30% or more depending on the mileage.
- Lease Returns: Consumers often think people that can afford to buy luxury and exotic cars will pay cash but this is not true. Most cars are leased for 2 or 3 years. What this means is that the moment the lease is offer, these cars will soon flood the market thereafter.
This is great for you and I, as it gives us (the consumer) more choices to choose from which in-turn also increases demand. Because of the surplus inventory, similar cars are listed by dealers which gives you better room for negotiating prices.
That same CLS550 from above is now reaching 50% depreciation in just the matter of 3 years now.
- Warranty Expiration: Most cars come with original manufacturer warranties that last about 4 years of 50,000 miles on average. Most people would never want to buy a luxury car out of warranty as they perceive repair costs to be high.
Consumers follow trends and will only budget for their cars monthly (like car payments) but not for unforeseen repairs. Because of this perception, demand for luxury and exotic cars continues to depreciate, thus dropping the price again.
You need not to worry about repair costs because most of the modern era cars are better built and a great independent shop can do repairs at half the cost of a dealership.
- Banks: As a car ages, most banks and credit unions will shy away from offering financing options due to the greater risk and lack of warranty. Because of the higher rates, payments can look undesirable to those that choose to finance but attractive towards cash buyers. Most people do not pay in cash.
The trick is to find an accredited bank or credit union that is open to insuring older cars, including antique, classic, and specialty cars. These financing options exist and are available to the everyday consumers like you and me, you just need to know where.
Now that you under new car depreciation, think about the last car you purchased and how much money you’ve lost within a few short years? Even better, think about how much money you could of saved if you bought the right slightly used car, with the right options and warranty, and in the right condition?