Car Shopping? Consider Depreciation

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NEW YORK (MainStreet) --Kelley Blue Book has just released a new report on six car brands with the “best total cost of ownership,” according to factors like depreciation during the first five years, fuel economy and insurance premiums.

While the study meant to highlight the most economical brands, it also underscores the enormous savings available to drivers who buy cheaper vehicles. A clever buyer could even use Kelley’s data to find good choices among used cars, by seeking those with the largest depreciation during the first few years rather than the least.

In the luxury category, Audi, Lexus and Cadillac topped Kelley’s list as cheapest to own for five years. Kia, Hyundai and Honda led the non-luxury brands. Of course, a car buyer should research data on individual models rather than just relying on averages for the maker’s entire lineup.

“The average vehicle typically maintains about 30% of its original MSRP [manufacturer’s suggested retail price] after five years of ownership, whereas a handful of vehicles maintain more than 45% after the same time period,” said Eric Ibara, director of residual value consulting for Kelley.

The average Audi had an MSRP of $47,506 and had lost $33,467 in value after five years, according to Kelley. Its total cost of ownership over that period was $68,866, compared to $73,605 for Lexus and $77,680 for Cadillac.

Among the non-luxury brands, Kia had a five-year ownership cost of $38,884, Hyundai, $40,092 and Honda $40,862.

Certainly, the luxury cars offer non-monetary value the others don’t – performance, beauty and prestige. But the cheaper cars obviously make more sense on a purely financial basis.

If you bought Kias instead of a Cadillacs, you’d save $38,796 every five years. That comes to about $466,000 over a 60-year driving life, or even more accounting for investment returns on the savings. Opting for cheaper cars could make it possible to retire five or 10 years earlier.

Kelley’s study assumes the car is sold or turned in after five years. If that is the owner’s intent, it does pay to seek a vehicle with below-average depreciation.

But depreciation, while it is the largest portion of ownership cost over five years, is less important if you intend to keep the car longer, because, in dollar rather than percentage terms, the heaviest depreciation comes in the first few years. After 10 or 15 years, the car will have little value – it will be fully depreciated regardless of what it cost originally.

So, if you plan to keep a car until it wears out, the initial cost is far more important than the rate of depreciation.

The most economical approach to car ownership is to buy a good used car that has already lost a good portion of its monetary value but still has most of its driving life ahead of it. With this strategy, one would look for a three- or four-year-old model with larger than average depreciation, assuming the actual vehicle is in good shape.

Are you car shopping with an eye toward the future? Check out MainStreet's look at four cars that meet the new fuel efficiency standards announced last month by President Obama!

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