The Perils of Depreciation
The first thing that happens to your vehicle once you drive it off the lot is depreciation. Depreciation is the loss of value of your asset, in this case, your vehicle. Studies show that after the first month of driving your vehicle will lose over 10% of its value. After 5 years, your looking at a loss of over 60% of its total value.
This is why it’s not a good idea to think of cars as investments in the traditional sense. They lose too much value too quickly. For this reason, people often consider leasing their car or truck rather than purchasing one. When you lease, your monthly payments are mainly covering the cost of the vehicles losing value.
Whether you’re leasing or owning the best thing you can do is maintain the value of your vehicle as best as possible. You can achieve this in a number of different ways, but first, let’s talk more about what depreciation actually is and why it happens.
What is Depreciation?
The concept of depreciation was developed to spread the cost to grow our railroad system over multiple years instead of expensing the cost at the time of the expenditure. Because of this system, railroad companies were able to show profits despite the fact that their investments were under wear and tear.
This theory of value became more and more prevalent and allowed companies to hedge their bets not only against wear and tear but also against technological advancements. Think of a business computer or, for car buyers, a vehicle without modern safety technologies. Both become less and less valuable as newer and newer capabilities are developed for the latest products.
The Causes of Depreciation
The moment you start driving a vehicle it begins to experience wear and tear. This means that the natural interaction between your vehicle and the road will cause its parts to be weaker and less relevant over time. New cars come out every year with new features and technology. The competition is so high, the standards set by 2012 can be totally different by 2020.
This doesn’t even take into account that you are taking a loss once you buy a vehicle simply because of taxes and dealerships fees. A vehicle may have a certain value, but the additional costs will always leave you in the red. This is not something to try an avoid, it’s merely the nature of buying and selling vehicles.
Can I Do Anything to Reduce Depreciation?
There are a few ways to reduce depreciation. One of the ways is to buy a luxury car. Luxury cars hold their value longer because of what people are willing to pay for what they consider to be of high value.
Another way to reduce depreciation is to not use your vehicle a lot. The fewer miles you have, the more valuable the vehicle is considered to be. But, if this is not an option for you, the next best thing is routine and high-quality maintenance.
Make sure to consistently keep up with the maintenance of your vehicle. This means changing the oil often, replacing worn parts, and generally being a safe driver. If you have a warranty, there’s no reason to not be taking your vehicle to the dealership every chance you get. Don’t just assume everything is ok, get a routine checkup to make sure everything is in tip-top condition.
Your new vehicle will depreciation no matter what and there’s not much you can do about it. But it’s especially important if you have a lease to make sure you are taking the best care for your vehicle as you possibly can. At the end of your lease you will be responsible for all the “depreciation” you’ve caused to the vehicle while it was in your care. Be sure to be as diligent as possible.