How quickly do cars depreciate in value? Well, it depends on the make, model, and year. Some vehicles remain highly desirable in the used car market, so they depreciate more slowly. Still, depreciation is usually inevitable, and often rapid.
In general, expect your new set of wheels to lose 20% or more of its value in its first year. (Some vehicles drop by twice as much.) In fact, a car loses a big chunk of its value as soon as you drive it off the lot! In Year Two, expect a loss of around 15%. Year Three: roughly 13%. Year Four: about 12%. If you buy a $20,000 Mazdolet Vroomster, it may be worth just $8,500 in only five years -- with depreciation amounting to $11,500. (Another rule of thumb says that cars lose between 15% and 20% of their value each year.)
If you buy new cars and drive them for only a few years before trading them in for other new cars, you'll be taking big depreciation hits. The longer you can safely and reliably drive your car, the longer you're putting off spending a big chunk of change for something that will quickly depreciate.
Depreciation is a key reason why it's worthwhile to consider buying a used car. Let's return to our imaginary $20,000 car. After two years, it's likely to have depreciated by around $7,000 or more. So, it'll be worth roughly $13,000. Let's say that it has, conservatively, another seven years of life left in it. If you buy a $13,000 two-year-old car and drive it for seven years, you'll have paid roughly $1,860 per year for it.
But think of how much it cost for the first two years: It went from $20,000 to $13,000 in value, costing about $3,500 per year. If you bought it new and drove it for only two years, that's what it would have cost you (excluding maintenance and repairs, of course).
If you buy a car new and drive it for many years, the average cost per year drops considerably. And, if you buy a good used car and drive it for many years, the cost falls further still. This is clearly a simplified example, but it offers some useful food for thought.
To learn about the ins and outs of the car-buying process, check out the Fool's How to Buy a Car area and ask any questions on our Buying and Maintaining a Car discussion board. Also, check out these previous articles, on new vs. used, pricing cars, and the real cost of car ownership.) Finally, don't forget to get tips on car insurance and other important kinds of insurance, at our Insurance Center.