One of the hidden costs in buying a new car is depreciation, or the drop in a car's value from year to year. While both new and used cars depreciate, the rate of depreciation is generally much greater for new cars, particularly in the first few years of ownership. It is up to you as a buyer to determine whether the value of ownership exceeds the cost of depreciation.
New cars depreciate in value as soon as you drive them off the dealer's lot. Depreciation is steepest in the first year of car ownership, tapering off the longer you hold the car. Over the first three years of car ownership, a new car will typically depreciate about 45 percent, according to Consumer Reports. This rate drops to about 25 percent over the next three years.
On average, a used car will lose 15 to 20 percent of its value each year over the long haul. However, these are simply averages, and some cars hold their value better than others. For example, the 2004 BMW 3-series lost only about 25 percent of its value in its first three years, while the 2004 Cadillac Seville dropped about 60 percent.
Depreciation is mainly a reflection of the difference between retail and wholesale values. When you buy a new car from a dealer, you pay retail value. When you drive the car off the lot, the car is no longer new and can only be sold at a wholesale value, or what the dealer would pay to buy the car back. The difference between retail and wholesale values is typically thousands of dollars.
According to Bankrate.com and Kelley Blue Book, the 2002 Ford Taurus had an original price of $19,035, but after 100 miles, the wholesale price had dropped to $15,390. This represents a drop of $3,645. About one year later, the same car had dropped in value only by another $725, reflecting a much slower rate of depreciation.
New cars unquestionably have a larger first-year drop-off in value than used cars, but you may get something in return for that price drop. New cars are always under warranty coverage from a dealer, and as the first owner, you don't have to worry about any hidden damage to a car. Maintenance costs for new cars are generally lower than for older cars.
After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.