If you are thinking about investing in a new car, you may be planning to use a car loan.
Though this is a common process, not all vehicle loans are the same. The type of vehicle, its condition, and it’s worth in the long term can play a role in the type of loan that is right for your needs.
Carefully take into consideration your options, especially when it comes to depreciation.
What Is Car Depreciation?
Every piece of property you own depreciates in value over time. As soon as you buy something, it is no longer new, and selling it would result in a lower price than what you paid for it.
The same applies to vehicle loans. When you buy a brand-new car, no one else has owned it. Yet, as soon as you drive it off of the lot, the value falls. The vehicle now has an owner. It is no longer possible to sell it as new. This causes near instant depreciation in the value.
Does that mean you should not purchase a new car? Some may say this is not ideal, but it is possible (and beneficial to many) to do so.
Factors To Consider With Car Depreciation
It’s important to make the right decisions based on whether or not you plan to maintain the car long term or sell it soon. This will drive your choice in whether you decide to buy a new or used vehicle.
How Much Is Your Vehicle Likely To Depreciate?
The rate of car depreciation depends on many factors.
Normal use drops the value of a car over time. Just aging makes the car worth a bit less. Accidents can speed up that depreciation as well.
More so, the rate of depreciation can also be impacted by the car itself.
For example, some makes and models are going to depreciate faster than others. A high-end, limited edition vehicle is likely to maintain its value longer than a standard passenger vehicle from a well-known manufacturer.
What To Expect In The First Years
During the first year of ownership, vehicle value falls the most.
In some situations, you can expect to see the car’s market value drop by as much as 20 percent in that first 12 to 18 months. The drop in value continues after this point, though at a slower pace overall. However, by the time you have owned the vehicle for five years, the value will have fallen, on average, about to about 60 percent of the original value.
Why Does Depreciation Matter?
It doesn’t have to matter to everyone. Some people purchase vehicles to use for years to come. In this case, it doesn’t matter to you if the value drops over those first few years. However, others may find it to be worrisome.
For example, if you buy a car and want to sell it in a year, chances are good you will get a fraction of its worth. And, that is where the problem with car loans can play a role.
Let’s say you buy a vehicle for $30,000. You love it, drive it, and enjoy it for the first few months. However, that two-seater trendy car isn’t going to work for you any longer now that you are expecting a child. You decide to sell the car.
The loan you took out was for the full value of the car. That $30,000 loan has only been paid down to about $27,000 at this point. Yet, the market value of your car has fallen by 18 percent. Now, it is only worth $24,800.
Consequently, you now owe more on the vehicle than it is worth.
Take Into Account Trade-In Value
The vehicle’s trade-in value can be a good starting point for considering depreciation.
Look up the trade-in value for the car you plan to buy or one very similar to it. Use it as a way to determine how much the car may be worth in a year or five. Having this information, you can then go through your loan options.
Choosing A Loan With Depreciation In Mind
All these factors considered, you may be wondering about your options.
Should you avoid buying the new car you love? That does not have to be the case.
There are a few things to keep in mind, though.
1. Long-Term Loans Are Risky
When you factor in car depreciation, the value of a vehicle after a long-term loan can be very little.
Try to choose a loan that is paid in full within five years. This helps ensure the vehicle is worth a significant amount at the time the loan is paid off. And, as a result, you may be able to sell it or trade it in if you plan to buy a new car.
2. Buy New Only When You Are Confident
When buying a new car, always make the best decisions for your needs based on the next year or two. Realize the value of the car will depreciate significantly within the first 18 months. If you are sure you will be able to maintain the loan during that time, invest in it.
Another option is to think about leasing the car instead of buying a new car outright. Though it is important to consider the limitations in leasing, it may work for those who want to switch between vehicles in a year or less.
3. Choose Used If The Vehicle Meets Your Needs
For those who are unsure if they can stay in the same vehicle, consider buying a used vehicle.
As a used vehicle, the value has already depreciated rapidly. While it will continue to drop in value, the pace will be slower. With a lower price, even a one-year-old vehicle is going to be a better investment.
Understanding Vehicle Value And Car Depreciation
Work closely with Destinations Credit Union on the loan as well. Be sure it fits your budget, but offers the shortest repayment time possible. We offer great low rates and flexible terms to meet your needs.
In the long term, this helps you to save money and still maintain a significant trade-in value if you have to sell it before you pay it off.
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