The word I am talking about here is most commonly associated with the motor trade and it’s very mention is enough make every vehicle owner shudder.
It’s depreciation!…there I’ve said it!
A dictionary definition goes something like this: “A decrease or loss in value, as because of age, wear, or market conditions.”
Unless you’re lucky enough to have something like a 1957 Ferrari Testa Rossa or a weird and wonderful classic Bugatti lurking in the back of your garage, it’s almost certain that your vehicle is currently in the throes of depreciation as we speak! It truly is the “silent thief”.
So what causes it? And if we can’t prevent it, how can we best limit it?
Well, depreciation “kicks in” the very second a brand new car is driven off the dealer forecourt. The initial buyer has paid the ‘retail price’. From the second it hits the road, it’s down to it’s ‘wholesale price’ (what anyone else would be prepared to pay from that moment). This could be a reduction of anywhere between 15 and 40 per cent.
After that, the general ‘rule of thumb’ is that most cars tend to plateau at losing between 15 and 20 of its value per annum, though the depreciation does slow slightly as the car gets older.
The biggest single factor which determines exactly how much a car depreciates is supply versus demand.
If a car is low in supply but high in demand, it will probably retain its value better and vice versa. For example the cars that depreciate fastest are the mass-produced models sold at big discounts to the rental or fleet market. These models flood the used car market when the fleets start to replace their vehicles.
Another big factor which determines residual value is brand reputation/notoriety; Whether real or not, there is a long-standing perception of quality and value. These beliefs can be cultivated by the effectiveness of advertising campaigns, aesthetics, positive/negative press reports and word of mouth.
Design can also play a huge part. Cars with a current, bold look such as the MINI Cooper are in demand and thus worth more. Once or twice a decade, a manufacturer may completely re-design a model and, in general, the first year of that new-look model will hold its value better than subsequent years, whilst also rendering the pre-existing model less desirable.
When it comes to features or ‘options’, owners should be aware that with things like cruise control, air-con and alloy wheels, it isn’t so much a case of them adding value to your vehicle, but that value is deducted in their absence! The same can be said about service history. As for exterior, an exotic colour may look great to you but not to a future buyer! Popular colours such as silver, grey and black tend to hold their value better.
It almost goes without saying that the mileage a car covers can drastically effect its value. Lower mileage cars may be a little more desirable so hold their value a bit more. Higher mileage cars are often shunned by franchised dealers and so their value is reduced more dramatically.
Finally, the level of depreciation is indirectly affected by areas of ownership cost, namely maintenance, repair, fuel and insurance. Any model with a history of costing an owner big bucks in these areas will inevitably suffer in the re-sale market.
So, in summary, all cars lose money – fact! But, if you want to limit the impact of depreciation, you should follow these guidelines;
Buy a desirable, nearly new/second-hand model (at the right price of course!) in a popular colour with all the essential ‘options’ for its class. This will ensure you have a ready-made audience of purchasers when you choose to sell.
Look after it by cleaning the vehicle inside and out at regular intervals. And keep those service records up to date. Using a reputable independent dealer will invariably carry more clout than a cheap, ‘back-street’ operation. Keep the mileage down as low as possible.
Watch out for new replacement models. If there is an all-new replacement for the model you are currently driving on the horizon, be aware dealers tend to heavily discount the outgoing model which will affect the market value of your vehicle. so, if you are thinking of selling you car, do it well before the new model hits the showrooms!