How Can I Minimise My Car's Depreciation?
QUESTION
This battleship-sized Audi A8 W12 lost its owner almost $250,000 in four years, to the black dog of depreciation. But depreciation on even mundane cars can be - literally - a deal-breaker
Hi John, I have just suffered the indignity of a low trade-in figure. That got me thinking, how many years after purchase is the best time trade-in a car? I understand depreciation, but is there a magic period of the least sacrifice?
ANSWER
Depreciation is an inevitable ownership cost. Some vehicles depreciate more than others, but they all follow the same general trend: depreciation is greater initially, and it reduces over time.
Apart from not trading in within the first year, which is an unmitigated financial disaster, there’s no magic ‘goldilocks age’ for trading in a car. Cars take a bit of a hit when the warranty expires, of course, but they take a bigger hit if a new model comes out. (Run-out sales are a joke, you end up paying for those at trade-in time, because the new model smashes the retained value immediately…) A real case of 'buy now; pay later'.
EXAMPLE
KIA SPORTAGE SLi DIESEL 2010 - 2013
The Sportage has been basically unchanged since it was launched in 2010 - a huge step up on its predecessor. You can see that if you trade it in at one year of age you're looking at copping a 19 per cent depreciation hit - which is a lot more than the fuel for 15,000km is going to cost you. But if you own it for four years, the average depreciation cost (per year of ownership) has just about halved, by comparison.
YEAR MODEL
2013
2012
2011
2010
New RRP
($)
$35,490
$35,990
$35,720
$34,990
Private Sale in 2014
($)
$28,850
$26,250
$23,850
$21,000
Total Value
Lost
($ / %)
$6640 / 19%
$9740 / 27%
$11,870 / 33%
$13,990 / 40%
Av. Value Lost
Per Year
($ / %)
$6640 / 19%
$4870 / 14%
$3957 / 11%
$3498 / 10%
After four years, other factors come into play: there's generally a new model in town by then; the vehicle has been superseded. The value continues to drop. But at four years the depreciation has been basically halved - per annum - compared to the manic-depressive option of trading in after just one year. If you own the car as a business asset, you'll obviously claim the depreciation as a tax deduction for the business. Your accountant will need to advise you on the most tax-effective time to go again.
IMPORTANCE OF BUYING THE RIGHT CAR
Of course some cars depreciate harder than others. 7-Series BMWs and Audi A8s are classic money-losers, as are most Lexus cars and SUVs.
Choosing the right car is very important, as you'll see below. People say Kia doesn't hold its value - and that view is clearly not true today. Compare the 60 per cent retained value of a four-year-old Kia Sportage (above) to these ... ummmm ... interesting cars below:
SIX DEPRECIATION DOGS
1. 2010 Alfa Brera V6
2. 2010 BMW 760Li
3. 2010 Lexus SC430
2010 Cost: $90,990
2014 value: $27,950
Depreciation ($): $63,040
Depreciation/wk ($): $303
Retained value (%): 31%
2010 Cost: $387,300
2014 value: $119,800
Depreciation ($): $267,500
Depreciation/wk ($): $1286
Retained value (%): 31%
2010 Cost: $165,488
2014 value: $53,050
Depreciation ($): $112,488
Depreciation/wk ($): $541
Retained value (%): 32%
4. 2010 Audi A8 W12
5. 2010 Fiat 500 Sport
6. Lexus LS600hL201
2010 Cost: $331,300
2014 value: $84,350
Depreciation ($): $246,950
Depreciation/wk ($): $1186
Retained value (%): 25%
2010 Cost: $26,990
2014 value: $9900
Depreciation ($): $17,090
Depreciation/wk ($): $82
Retained value (%): 37%
2010 Cost: $259,900
2014 value: $67,500
Depreciation ($): $192,400
Depreciation/wk ($): $925
Retained value (%): 26%
The weekly cost of depreciation for the four-year-old Sportage above is just $67 - its the only one of these seven cars where the cost of depreciation is even halfway reasonable. Why? It's good-looking, popular, and affordable. And demand is through the roof for SUVs right now.
It's hard to feel sorry for anyone with a budget north of $250k (and in the case of the Audi and the BMW, considerably north of $250k) to dump on a car. But the thought of paying $1200-$133 a week - for four years - to the devil of depreciation is simply outrageous. It's invisible, too - you don't pay it until it comes time to sell. The Brera is a beautiful car, but the economics of ownership aren't. And the diminutive Fiat 500 Sport? I put that there to demonstrate how a fuel-efficient $27k car can actually cost you more to own that a medium-sized SUV costing more like $40k.
At one level it's tempting to buy one of these expensive luxo-barges, considering just how profusely the first owner has bled all over them financially. Just bear in mind that they're out of warranty, and if something major goes wrong the repair cost is ... well, let's just say you'll see the bill from space.
All prices used here are private sale prices, too - so they're higher than you'll get for a trade-in. In the case of the bleeding-from every orifice V12 Audi, about $11k more. I guess that's just another few weeks' depreciation...
IS TRADING IN THE WAY TO GO?
Are you sure this trade-in is on the money? Dealers often cook the books on those.Of course, one of the best hedges agains depreciation is to sell your 'old' car privately, which commonly realises a few thousand dollars more in the 3-5 year age group, for reasonably common cars. Of course this takes more time and effort, which is what the dealership is counting on (because the unique selling proposition of a trade-in is not the price; it's the convenience of getting rid of the car you no longer want, quickly and easily).
The 2011 Kia Sportage SLi detailed above has an average private-sale price of $23,850 according to a popular online database. The same database puts the average fair trade-in value at $19,550. Conclusion? You stand to make 22% more - that's an extra four-and-a-bit thousand dollars
Let me get Ben Harris from the brokerage to call you ASAP. Ben is an expert in the new vehicle pricing area and he can help you achieve the best price on any new vehicle, plus help you get a good trade-in. Ben can also assist with competitive, low-rate finance if this helps.