IntelliChoice 5-Year Ownership Costs

Understanding Depreciation

There’s been a lot of talk in the automotive world lately about depreciation and retained value. Domestic manufacturers are battling over claims as to whose vehicles hold on to value the best. Such claims are ironic, as these manufacturers are the same ones offering “employee discounts for everyone,” programs which push down the worth of used cars, continuing the cycle of deep discounts—and deep depreciation. But what is this thing called depreciation, and how should it affect your vehicle purchasing plans?

What is Depreciation?

Defined simply, depreciation is the decrease in the value of an object over time. It can be a book, a computer … just about anything. An object depreciates as it becomes worn, superfluous, old-fashioned or outdated, and as repairs to it become difficult and expensive. With the exception of “classics,” all cars and trucks are victims of this inexorable trend. Retained value is the opposite of depreciation; it is the value something holds over time. In the case of automobiles, we express this as a percent. In this way we can easily compare vehicles to one another. Also, be careful not to confuse resale value and retained value as they are sometimes used interchangeably in advertising. Resale value is how much (in dollars) the vehicle is likely worth, while retained value is the amount of worth it holds over time. A Lexus LS will have a higher resale value than a Civic; however, over five years, the Honda will hold a greater percentage of its original value than the Lexus.

Depreciation is odd because it’s the most abstract area of vehicle ownership costs. It’s easy to feel the effect of fuel costs: You stop at a gas station and say goodbye to perhaps $50. You don’t stop at a depreciation station and pay $100. In that respect it’s not a tangible drain on your bank account. In fact, depreciation doesn’t really hurt until years after your purchase, when it’s time to sell or trade in your car—then you discover you just “paid” $12,000 for the privilege of owning what was once a $25,000 car. Worse, if you’re trying to get out of an upside-down loan—that is, you owe more than the vehicle is worth—you could find yourself in a major financial hole.

Why is Depreciation Important?

For the vast majority of vehicles, it’s the largest segment of ownership costs. Whether you’re talking percentages or dollars, depreciation is the primary component that determines if a vehicle is an overall good value. Both during your research and when you’re at the dealership don’t become fixated on the seemingly all-important purchase price of a car. Keep in mind that five years down the road, your car may have lost up to 70% of its value, making what you paid for it seem relatively insignificant. For a pricey vehicle, the dollar amount of depreciation can be staggering—almost three times the amount of the next largest slice of the ownership cost pie, which is usually financing. Depreciation can become even more important when evaluating how good of a lease offer you are getting, because the payments are based on the depreciation costs they are quoting. This is especially significant if you are planning on purchasing the vehicle at the end of the lease. Check a vehicle’s projected retained value for the same period from an independent source against the purchase price at the end of the lease and see if it’s way off base. If it is, there may be room for further negotiation.

Not all vehicles depreciate at the same rate. IntelliChoice’s exhaustive research and analysis to determine those rates is a complex blend of art and science. It involves the tracking of resale values for thousands of used cars and trucks and applying those trends toward mathematical projections of the corresponding new versions of those vehicles. On the other hand, it’s easy for you to take our findings and our expertise and benefit from them. While a few of the parameters that govern depreciation are out of your hands, most are in your control. After all, you’re deciding what vehicle to purchase and how to use it. Some things are a given: If you drive a vehicle an above-average number of miles per year, it won’t hold its value as well. If you don’t maintain the vehicle, its value will sink. If you trade-in that car at a dealership, you’ll get less for it than you would via selling it to a private party. But those are just the obvious parts of the equation. Here are other factors to consider before you go car shopping.

The Facts About Depreciation

Many people—and many automotive research companies—over-generalize when they discuss depreciation. Some of these assumptions attain mythic proportions, such as “A vehicle loses a huge amount of value the moment you drive it off the lot, and continues to do so at dramatic pace for a couple of years, at which point depreciation begins to level off.” Well, that trend is true for a good percentage of cars … and for a good percentage, that’s the opposite of what happens. A trendy new model that has utterly captured the public’s imagination may hardly lose a dollar of value for months simply due to tremendous demand. But after a couple of years that vehicle’s star will fade and its resale value will begin to plummet. The first model year of the PT Cruiser documents this phenomenon spectacularly. Having just said that, the MINI Cooper may never depreciate much if its current trend continues. The point is, don’t assume that if one model loses its value at a certain pace, a similar model will follow suit.

Let’s look at some specific vehicle classes, starting with convertibles. Ragtops tend to be perennially popular, and intuition tells you that popular vehicles hold their value quite well. But it depends on the manufacturer and the model. Some convertibles have tremendous relative resale value; others are no better than average. Luxury models? Same thing: It depends on the brand and the model. For example, in its fairly brief history the Infiniti G35 coupe is holding onto its value amazingly well. The Infiniti Q45 sedan, though improving in recent years, continues to depreciate far more drastically. What about the other end of the automotive spectrum? You’d think so-called economy cars would maintain excellent resale value because they don’t have a lot of value to lose in the first place. Once again, it depends. In general, the Honda Civic lineup always has very good depreciation forecasts, while a competitor such as the Dodge Neon fares much more poorly.

Then there’s the perpetual phenomenon of the SUV. They’re always in demand, but now it seems like a hundred models are available. With owners eager to drive the newest thing in a competitive class where new and updated models are constantly appearing, the used marketplace is flattening under the weight of all these trucks being dumped into it. As a result, SUVs no longer retain their value as tremendously as did the handful that existed many years ago. Sky-high gas prices don’t help either, though this will cause smaller SUVs to retain a somewhat larger proportion of their value as they age.

Every single vehicle in the marketplace loses value at a unique rate, and those rates follow the vagaries of public interest, the health of the automotive industry and countless intangibles. You’ll see these emerging trends revealed when IntelliChoice presents its depreciation calculations for a new model year.

Here’s another factor to take into account: It’s important to pay attention to where a new car or truck falls in its life cycle. Automakers often “freshen” a vehicle at varying intervals during the years it is manufactured. The smallest changes may be nothing more than a restyled front bumper, grille and taillights. Such freshenings will have little effect on the value of a vehicle over time, or on its predecessors. However, once or twice a decade a manufacturer will completely redesign a model, totally revising its interior and exterior (sometimes improving it) while making major engineering, safety and structural changes (always improving it). In general, the first model year of that newly-redesigned vehicle will hold its value better than subsequent years, and it will hold its value much better than the previous-year, previous-generation vehicle that finds itself little more than yesterday’s news. Of course, that means you’ll be able to purchase that older vehicle for a bigger discount … but that won’t stop its deeper depreciation.

There are multiple facets to this situation, however. It follows that a model that receives redesigns only rarely will hold its value better—it just doesn’t become outdated. But what if this is the result of what could only be described as “neglect” by the manufacturer? The Chevy Astro and its corporate sibling, the GMC Safari, haven’t changed much in two decades—veritable eons in auto industry—so you’d expect them to retain their value superbly over time. But that’s not the case. They’re built on an old automotive architecture, they’re not highly sought-after models and thus suffer from weak sales, and in fact are perpetually in danger of having production canceled. All of this ultimately leads to depreciation rates that at best are average for their class.

One place where generalizations tend to hold true is in the land of trim levels. You’ll notice that manufacturers often sell a model in a variety of different trims, e.g. L, LS, LX, LXi and so on. Historically, higher trim levels, commanding higher MSRPs, usually hold their value poorly when compared to lower trim levels. That might seem counterintuitive—“Surely cars with lots of added equipment are more desirable!”—and in fact they may very well be the biggest sellers, but that’s their own downfall. Nothing about that additional equipment is unique. All cars competing in a specific price or trim range tend to have the same convenience and luxury items, which lowers the exclusivity of that very equipment. Don’t forget that all of those parts depreciate right along with the car itself. Perhaps more importantly, many of the items in the highest trim levels have little intrinsic value in the first place. Heated seats, rain-sensing wipers, chrome bumper strips, two-tone leather, wood trim, and so on may all be desirable, but their worth quickly gets assimilated into the value of the “body” of the vehicle. In fact, many such items—especially electric and mechanical ones—can even be seen as a liability due to the potential of them breaking down or simply deteriorating, which can only add to the rate of depreciation.

After all this, you may still be wondering why two near-identically priced cars, with near-identical equipment, depreciate at different rates. Why do Vehicle A and B both start out at $30,000, but after five years A is worth $14,000 while B has retained $18,000 of its original price? It’s due to all the reasons stated above—and more—distilled into the concept of desirability. That’s not surprising, and it reveals the other side of the picture that we painted at the beginning: An object or commodity that is desirable, that contains and generates its own worth rather than having worth foisted upon it by fashion trends or by product placement, has greater perceived value in the marketplace over time. Desirability is a mercurial, elusive concept on which manufacturers spend billions of dollars, in fleeting attempts to capture it. But don’t confuse desirability with popularity. It’s not about sheer numbers of vehicles sold; by that logic, the more a model increases in sales, the more common it becomes, leading to worse depreciation. And that’s just not necessarily true. By the same token, don’t confuse desirability with scarcity. If you have your heart set on a particular car and can’t find it on any dealer’s lot, it may not be because car buyers are running about madly, snatching them up.

One final point: Depreciation is indirectly affected by the other four areas of ownership costs. A model whose ancestors have a history of poor maintenance and repair costs, a model that always gets poor gas mileage, a model that has never fared well in the eyes of insurance companies, will have these negative elements reflected in the used values of its ancestors as they age. It’s difficult for a car to escape its past. On the flip side, for a model whose ancestors have good history in these areas and thus additional demand in the used marketplace, its own depreciation will benefit.

The ownership cost pages for each vehicle on our website shows you the projected five-year depreciation of each trim variation of a vehicle available. If the vehicle is also the Best in Class or a smart choice for retained value, it will be noted as well. Use IntelliChoice’s exhaustive research and resources to learn which cars and trucks have been instilled with desirability and thus excellent depreciation, and then see if they match what desirability in a vehicle is to you.