Beware the hidden costs of depreciation

Are you prepared for the ugly bite depreciation takes out of your vehicle's value?

Published: May 14, 2015, 4:55 PM
Updated: November 23, 2021, 11:58 AM

Downward graph

By Josh Bailey

Most of us love the idea of a new car, why wouldn’t we? Swoopy new looks, all the latest features, admiring glances from the neighbours. But few of us are prepared for the typically ugly bite depreciation takes out of our shiny new baby’s value.

The old adage of a new car losing 30% of its value the minute you drive away isn’t quite accurate, but the real figure is still a scary 20.28% on average!

So why do cars take such a hit? Well, a few reasons; first off, your car isn’t new any longer. Like a phone, a computer, or even a shirt, nobody wants to pay full price for someone else’s used stuff.

Still, the magnitude of the hit is somewhat surprising because the expected life of a car is much longer than that of the latest gadget or your favourite Hawaiian shirt.

Second, there is always something faster, more efficient, or better looking hitting the car market – and we want that one, not last year’s. We are spoiled for choice, with even small cars packed to the roof with features that we hadn’t dreamt of 10 years ago. That means our new ride doesn’t have the pizzazz it once did, even a year ago.

Of course there are differences in depreciation from brand-to-brand, for different sizes and types of vehicles – even colours matter.

Every year Canadian Black Book awards the vehicles that lose the least value over four years and from those awards one can identify brands and models that perform very well, along with specific types of vehicles that outperform the market.

Postponed pain

Even though you don’t feel the jab of depreciation in the ribs right away, you will feel it when you try to sell or trade-in your vehicle. It also makes a difference if you are leasing – more on that later.

You may get a great monthly payment on your new car but unless you intend to drive it until the last trip is to the scrap yard, depreciation will change your overall cost. By choosing a car that depreciates more than average, when you sell or trade it you will get less for it and your overall cost of ownership will be greater.

It's a simple enough concept to grasp and sometimes it can mean thousands of dollars of cost difference, depending upon the vehicle.

Calculate the cost

So, when buying a new (or even used) vehicle, your monthly payment is only part of the cost picture. It needs to take resale value into account too.

To do so, research the future values of the cars you’re considering for your next purchase and factor the deprecation on each back into your monthly cost.

It’s simple to do, take the price you are likely to pay for the vehicle, subtract the future value (which you can determine using Canadian Black Book's Future Value tool) and divide that figure by how long you intend to keep the car, in months.

This will tell you how much depreciation costs each month. Get a sedative ready; it’s usually a shock to most people.

Let’s look at an example. Take a compact SUV, Canada’s most popular segment of vehicles. The average suggested retail price for this segment is $29,400 – we don’t need taxes for this example. Sorry – you’ll still have to pay them though.

Canadian Black Book estimates that the average vehicle in this segment will be worth $12,000 in four years. That’s $17,400 in depreciation – which translates to $360 per month! That may be as much as or more than your finance payment in many cases.

What if you lease?

By definition, a lease essentially means the lessee, that's you, covers the expected vehicle deprecation plus interest. 

Take heart though, there is practice in the car business for some companies to boost the future residual value (the forecast price after depreciation) to help make their products more competitive, on a monthly payment basis – a little known perk for consumers.

The car makers are so anxious for your business that they will bump the end value up so you have a lower monthly payment – their money on the line, not yours.

No matter how you look at it, depreciation is likely going to cost you dearly. So when you’re shopping for your next set of wheels don’t be swayed by the latest gadgets and monthly payment alone – think about the boring but practical aspect of depreciation. You will thank yourself later.