What Does Vehicle Depreciation Cost?

Depreciation is the invisible cost of vehicle ownership. In the first year you own it, your new vehicle may lose 20% of its original value due to depreciation, according to IntelliChoice, based in Campbell, Calif. By the end of the fifth year, your vehicle's value drops by an average of 35%. But it's not only vehicle buyers who take a hit. Depreciation affects the cost of leasing as well, because leasing payments are based in part on what a vehicle will be worth at lease-end. The more a vehicle depreciates, the less it will be worth when your lease is over, and the higher your monthly leasing payments will be.

You can't stop depreciation. But you can lessen the impact depreciation will have on your wallet. Here are a few points to consider:

Some makes and models depreciate faster than others. Accurately predicting depreciation is difficult because so much depends on a vehicle's continuing popular appeal. The Credit Union National Association Web site has a depreciation calculator. To view click here.

The pace of depreciation levels off after five years. Hanging on to a vehicle for at least that long minimizes the impact of depreciation on the overall cost of ownership.

It's smart to pick options that will appeal to the next buyer: air conditioning, automatic transmissions, sunroofs, and convertible tops. Lesser known models, "luxury" or "limited edition" models, and vehicles with odd colors or features tend to depreciate faster.

Avoid Being Upside Down in Your Car Loan

A low- or no-down payment, a longer-term loan, and a vehicle that rapidly depreciates in value in the first two years can cause you to be "upside down" in your car loan. The term means you owe more for the car than it is worth. It's not unusual for a buyer to be upside down in a car loan a couple of years into a five- or six-year loan.

Consumer experts recommend making a down payment of 20% or more and financing for no longer than four years to avoid being upside down. Not everyone can do this. Some alternatives:

• Don't finance a car for more months than you think you want to own it,
• Make the biggest down payment you can,
• Choose a shorter-term loan if possible, and
• Buy a vehicle that will hold its value longer.

If you find that you're upside down in a loan, experts advise holding onto the car as long as you can--at least until the amount left on the loan matches the car's trade-in value. If you need to get rid of it, try selling it yourself or consider bundling the negative equity from the car with a loan on a new car. If possible, accelerate your loan payments to avoid being upside down in your new loan. Contact us at 535-0191, 1(800)828-8691 or info@progressionscu.org for more information.

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