Why does depreciation matter when buying a new car if you don't plan to sell it?

I don't think people buy cars with the thought of how much they can sell it for after a week or a year. I assume that most people buy cars hoping they will last as long as possible. So why does it matter if it loses value when it's driven off the lot? When you buy a fancy dress or suit, do you think about

I don't think people buy cars with the thought of how much they can sell it for after a week or a year. I assume that most people buy cars hoping they will last as long as possible. So why does it matter if it loses value when it's driven off the lot? When you buy a fancy dress or suit, do you think about how much it will be worth at a thrift store shortly after you walk out of the mall?

The cost between a new and used car can be staggering, but aren't you paying for piece of mind? I would gladly shell out a few thousand extra to know that there's a good chance my car won't break down after a week and that the last owner didn't enjoy joyriding in the mudflats every weekend. I realize that some new cars can have immediate problems and some used cars can be driven forever without any problems, but I would put money down that a much higher percentage of used cars will have more problems than new.

Anyone else agree?

Best Answer:

lagrone: It's true that depreciation doesn't matter much if you intend to keep the car forever — except for one situation. If your car is ever stolen or totaled in an accident, your insurance company will only pay you the depreciated value of your car, which can be huge problem if you are "upside down" on your loan, meaning that you still owe more than the depreciated value. You would need cash to make up the difference.

Many people like buying brand new cars to get a full manufacturer's warranty, Lemon Law protection, the latest technology and safety features, and of course, that new car smell. And some people simply don't care to buy something that someone else has owned.

Other answer:

I do agree that in your situation, depreciation means nothing. However, you need to look at the big picture. In the US, the average length of an auto loan is 66 months. Problem is, the national average for term of ownership is only 36 months. People buy a car, taking out a loan for 60-72 months, but only keep it for 36 months. Depreciation in this case is a big deal. Leases are also figured using a residual value, which is based on depreciation over a set amount of time.

Depreciation means nothing if you're keeping your car. However, the majority of people don't keep their cars. Whether it makes sense or not is irrelevant. The reality is what it is.

You are right. I would normally agree if your budget can handle it.. Go new..

But to handle you question about Depreciation…

Perfect Question.

First I will start by saying it matters because if you plan to trade the car in you will have more negative equity for a longer period of time, on a car that does not maintain its value.

Secondly, if by some chance, God forbid, that the vehicle is wrecked, stolen, or otherwise declared a total loss. Your insurance company will only pay what they deem the car is worth. For example, if you wreck your car and it is totaled and you owe 20k on it. The insurance may only offer you 13-15k. So that means to break even you would have to pay the difference, plus your deductible ( usually $500), to no longer have a balance due on your account.
In short a car that holds its value better will have a smaller "gap" in value and thus expose you to much less risk.

Most insurance companies and Auto Dealers offer Gap Insurance which will pay the difference and reimburse you for you deductible. Then you walk out free and clear.
Best part is that the GAP insurance is really very very cheap. usually only affecting the payment 5-10 dollars a month. Keep in mind that most people pay 100-150 MONTH for "so called FULL COVERAGE ins" that doesn't pay the "FULL AMOUNT".

Another way to offset this is to put a large down payment, plus cover all your tax title and license fees.

This will not only save you from a negative equity situation, but will also make your loan more favorable to a bank, thus getting you a better finance rate ( lower interest ) and you will also have much lower payments because you are financing less money overall, because of the down payment.

I am a Finance Director for a large Auto Dealer in TX.
GMC, Pont., Chevrolet, KIA, Hyundai, Isuzu.. 2500 plus cars a month.

Cant you have everything you want and still be better off with a car that depreciates less than others ?

9 months ago, I bought a 2012 Model with low miles. I plan to keep it at least 7 years.

I just figured out my cost of ownership if I keep it 7 years and it comes out to $69 a month.
$1600 down, no doc fee,tax & title oop and no acquisition fee.

If I keep it 10-12 years, my monthly cost of ownership would go even lower.

That doesn't include any repairs my car may need. And frankly, I may keep this car for 12+ years.

I was able to estimate my residual value at $3350 in 7 years. Higher than it would be for many because I drive very little.

I've only owned one car, and I kept it for 14 years until I settled in New York. During its last few years of life, it was a constant worry to me. So I can imagine that a good many people would prefer to sell their cars while they are still drivable. And even if you don't plan to do that, you can't predict the future. You may suffer a financial downturn, or want to take out a loan. The value of all your assets will make a difference then, even if you don't actually sell them.
A car that's just a year or two old and has less than 5,000 miles on it isn't likely to break down that much sooner than a brand new car. If the cost is significantly less than one that's sitting on the lot, then I think it's a better financial deal. I drive my cars into the ground rather than sell them so it's not about the resale value for me either. It's about how much I'm paying out of pocket to get the car.
Depreciation is more of a tax issue. If you have a business, depreciation decreases the value of capitol assets, which means you pay less tax.
It is just a selling point for some uppity dealers. it does not matter. I have NEVER purchased a used vehicle. Obviously new one are MUCH cheaper, than buying someone's old junk.
Love big words:

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