You’re probably aware that your car loses its value over time, but have you ever wondered why that Is? If you have then you’ve come to the right place, because in this article we’re going to be giving an overview of deprecation and why cars depreciate so fast.
What is Deprecation?
Depreciation is a financial term that refers to an asset that loses its value over time. A car for example may start at a value of $30,000 but after 7 years of service will be valued closer to $10,000, less than half of its original value.
This depreciation does not happen at a consistent rate, in cars the majority of depreciation happens in the first 1-2 years, and it’s common wisdom that a car loses 30% of its value as soon as you drive it off the lot.
There’s 2 reasons why cars depreciate so fast, so let’s start with the one that might seem more obvious. Cars get old and break down, they rust and need replacement parts and general maintenance. Naturally it goes then that a car that’s been in service is going to be worth less than a shiny and new car because it needs several repairs in order to be brought back to a new condition.
Of course If the actual condition of the car is the main driver of depreciation, then that rule about it losing most of its value in the first few years doesn’t make any sense does it? Unfortunately while saying the physical condition is the reason makes logical sense, finances are rarely so simple.
The thing that will make this understandable is to recognize that the value of a car is only based on how much people are willing to pay for it, not how much it’s literally worth, money is flexible. The reason the value goes down 20% when you leave the lot is because when it leaves the lot it becomes a “used” car, and that used label instantly means people are willing to pay less for it.
The other thing that will make people less interested is that as new cars are released with updated technology, old cars become less desirable in the minds of most people, therefore the previous generation of car’s value depreciates.
Can You Stop It?
Depreciation is a fact of finances, there’s no real way to stop it barring some crazy world event that makes cars a rarity. Some car models (like Jeeps) are more resistant to depreciation than others, but at the end of the day, depreciation is a fact of life that you simply must accept when you buy a car.
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