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Your
Car as “Piggy Bank” – Part Three
Depreciation
Rears Its Ugly Head
Depreciation.
Not a pretty word: it basically means that the value
of your merchandise declines over time.
It’s a fact of life in the car business because,
unlike a home, you basically never sell a car for a
higher price than you paid for it (exceptions could
be classic cars or specialty vehicles, but those are
not what most people buy for their everyday driving
needs). Knowing this, Frank Price Company tries to
ensure that you get a car that holds its value, and
one for which you paid a reasonable price, given your
trade-in habits. Our goal is to keep more of your money
in your “piggy bank,” and less in the pockets
of the dealer, all while you drive a reliable car,
and one that you enjoy.
When
considering this situation, you must realize that
it can make a difference to buy certain makes
and models new (versus one or two years old), and that
there are differences in how much different car models
and makes depreciate. For example, a Honda Accord doesn’t
depreciate as much as a Toyota Camry at re-sale, but
you may be able to get better discounts on the Camry
up-front. In the long run, if you plan to keep the
car for a long time, the Camry may be the better deal
for you—or not. That’s why we ask you questions
about your car driving and buying habits, and about
what you want from your vehicle. We strive to find
the best possible deal for you based on your own personal
factors.
How
Does Depreciation Work?
Let’s look at the Ford Taurus or a Mercury Sable. These cars sell for
$24,000 to $25,000 new, and you can get discounts and zero percent interest.
Sounds good. But the cars depreciate so much in the first year ($10,000 or
$11,000) that you still don’t come out ahead if you trade-in at one year,
even with the zero percent interest. And those who are paying a regular interest
rate lose even more. Does that mean you should never buy a Taurus or Sable?
Certainly not. But it does mean that you probably don’t want to buy one
new—you will get a better value if you buy one that is a year or two
old for a lower price, and which will only depreciate by about $2,000 per year
thereafter.
High-end
Depreciation
The depreciation in high-end cars can be an even more bitter pill to swallow.
There is not a large market for cars in the $70,000 or $80,000 range in the
first place, but those who have the money for them generally want them new.
Therefore, the depreciation “hit” is even more severe. Take the
example of a BMW 740iL. These cars sell new for $80,000 or $85,000, but one
year later, they sell for somewhere in the $55,000 to $60,000 range. That’s
great if you are the person buying the one-year old car, but not so great if
you’re the unfortunate person who lost $25,000 to $30,000 in one year
on a car. The same thing applies to a Mercedes S class or Mercedes convertible.
These cars sell new for $78,000 - $93,000, and can be bought for $55,000 a
year later. It’s well worth it to consider how long you plan to keep
the car before you make your buying decision.
What’s
the Best Decision?
You must consider the depreciation of the car along with the other factors
(reliability, what kind of vehicle you like and desire, your driving and mileage
patterns, how long you plan to drive the car, etc.). You want a reliable car,
but you don’t want one that loses so much value up-front that you can
never get out of “the hole” if you decide you want to change after
six or eight months. This is worse, obviously, if you think your car is unreliable
(you feel you’ve been taken) but even if you think you have a fine, reliable
car, you don’t want to be in the position of owing more than the car
is worth at trade-in time. Does this mean we will never recommend a Taurus
or Sable? No, but it does mean we probably won’t recommend buying one
new when you will retain more value on the car if you buy it one or two years
old.
Depreciation
is a fact of life in the car business, but having
a buying agent who is familiar with many
different car makes, their selling prices, and what
discounts are available can help you find the best
vehicle to suit your needs. Give us a chance to put
you in the driver’s seat of a car you love
while leaving you enough money to gas it up!
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