Vehicle depreciation and auto loan.

Vehicle depreciation is an essential concept to understand, whether for a cash purchase or for auto financing. It not only influences the resale value of a vehicle, but also the choice of auto loan or car loan, and therefore the associated financial conditions. Indeed, understanding how a vehicle loses value over time allows you to make more informed choices regarding its acquisition and financing.

1.1 What is vehicle depreciation?

Vehicle depreciation is the rate at which a car loses value over time. As soon as a new car leaves the dealership, it immediately begins to lose value. This decline in value continues throughout the vehicle's life, although the rate of depreciation can vary depending on several factors.

For example, a new vehicle can lose between $20 and $30 in value in the first year. This means that if you finance a new car with a $30,000 car loan, its value could drop to around $21,000 after one year. Depreciation continues, but at a slower rate in subsequent years. So, understanding this depreciation is important to assess whether you need car financing that is appropriate for the length of time you plan to keep the car.

1.2 Why is depreciation important to consider?

It is crucial to consider depreciation before taking out a car loan or auto financing, as it can influence how you choose to structure your loan. If you borrow a large sum to finance a vehicle that depreciates quickly, you could find yourself in a situation of negative value, which means you'll owe more on your car loan than the car is actually worth.

This can be problematic if you want to sell your vehicle before the end of the car loan. You may then have to pay the difference between the residual value of the car and the amount still owed on your car loan. This is also a key factor to consider for those considering lease agreements, where the residual value of the vehicle at the end of the lease period is a central factor in calculating payments.

For example, if you take out a 72-month car loan for a car that loses $40 million in value over three years, you may find that the resale value of the vehicle is less than the amount remaining on your car loan. This can make it harder to sell or replace your vehicle.

1.3 Factors influencing depreciation

The depreciation of a vehicle is influenced by several factors, some of which are related to the model of the vehicle itself and others to its use and maintenance. Here are the main ones:

• The age of the vehicle : The older a vehicle gets, the more its value decreases. Depreciation is generally faster in the early years, but it slows down over time. For example, a vehicle may lose 50 % of its initial value in the first five years.
• The mileage : The more miles a vehicle has on the odometer, the higher its depreciation. Higher mileage means more mechanical wear and tear, which affects the value of the vehicle. So, a car loan on a car with high mileage might require different financing terms.
• The general condition of the vehicle : Well-maintained cars, without major damage, depreciate less quickly than those that have been in accidents or have had major repairs. Good maintenance can therefore help preserve the value of your vehicle and obtain better terms for a car loan in the event of resale or refinancing.
• The make and model : Some makes and models hold their value better than others. For example, luxury cars or vehicles from certain Japanese brands known for their reliability, such as Toyota or Honda, depreciate less quickly than others. This means that car financing on a car from a reliable brand could be a better investment in the long run.
• Market trends : Fluctuations in the automotive market, such as increased demand for electric vehicles or changes in consumer preferences, can also influence depreciation. For example, a car loan for an electric vehicle could be more advantageous if demand for this type of vehicle increases in the future, thus maintaining its value.

When buying a car, it is essential to understand the different factors that can accelerate the depreciation of the vehicle. These elements directly influence the resale value of the vehicle and can affect the total amount you will have to pay for your car financing. By anticipating these factors, you can better plan your purchase and your car financing strategy.

2.1 Age of the vehicle

The age of the vehicle is probably the biggest factor in how much a car depreciates. Vehicles lose most of their value in the first few years after purchase. Typically, a new car can lose between $15 and $30 in value in its first year on the road. That means if you finance a $40,000 car with a car loan, its value could drop to around $28,000 after just one year. This rapid initial decline gradually slows down, but the vehicle continues to lose value over the years.

For example, if you opt for a five-year car loan, it is likely that the value of the car will have already decreased by more than $50 by the time you finish paying off the car loan. Therefore, the speed of age-related depreciation should be taken into account when choosing the term of the car loan.

2.2 Mileage and mechanical wear

Mileage is another key factor that accelerates the depreciation of a vehicle. The more a vehicle has been used, the more wear and tear it has undergone, which lowers its value. A vehicle with high mileage is often perceived as having suffered significant mechanical wear and tear, which can lead to more frequent repairs in the future. Choosing a extended warranty to come and protect your vehicle can be a very good decision to avoid further devaluation.

For example, a car that has driven 150,000 kilometers in five years will depreciate much faster than a car of the same age with only 60,000 kilometers. So, if you finance a vehicle with a car loan and plan to drive long distances, you must take this wear and tear into account. This can also influence the car financing strategy: a vehicle with high mileage may require a car loan with more flexible terms or a shorter term, so as not to pay more than the residual value of the vehicle at the end of the loan.

2.3 General condition and maintenance of the vehicle

The overall condition of the vehicle, as well as the maintenance it has received, plays a crucial role in depreciation. A well-maintained vehicle, without major damage or visible signs of wear, will depreciate much more slowly than a vehicle that has been neglected. Factors such as worn seats, scratches on the paint or unrepaired accidents can significantly lower the value of the vehicle.

For example, two cars of the same year and model can have very different residual values depending on their condition. If one has been regularly maintained and is in perfect working order, it will depreciate less quickly than one that has been in accidents or had major repairs. If you are taking out a car loan for a vehicle, keeping it in good condition can not only slow down depreciation, but also help you get a better resale price, which will reduce your financial loss at the end of the car loan.

2.4 Brands and models with high depreciation

Not all makes and models are created equal when it comes to depreciation. Some brands are known to lose their value faster than others. For example, luxury cars like BMWs or Audis tend to depreciate faster because they cost more to initially purchase, but demand for used models is often lower. Conversely, brands like Toyotas or Hondas are known for their reliability, which allows these vehicles to retain a better residual value.

If you choose a model that depreciates quickly, such as a luxury car, this may influence your car financing strategy. You may be better off opting for a shorter car loan term or planning a larger down payment to compensate for the rapid loss in value. On the other hand, a car loan on a vehicle that has a more stable residual value may be more advantageous because you are less likely to end up with a loan balance that is higher than the value of the vehicle.

2.5 Technological innovations and obsolescence

The rapid evolution of technologies In the automotive sector, another important factor that accelerates the depreciation of certain vehicles is the fact that newer car models often come with newer technologies, such as driver assistance systems, digital dashboards or advanced connectivity features, which makes older models obsolete more quickly. For example, the rise of electric cars with longer ranges or semi-autonomous driving systems can depreciate older or less well-equipped models.

This technological obsolescence is particularly pronounced in the field of electric and hybrid vehicles. If you are taking out a car loan for a current electric vehicle, it is essential to take into account the rapid evolution of batteries and charging systems. A car loan on a vehicle with obsolete technology can lead to a faster loss of value, leaving you with a car that declines in value more quickly than expected.

Vehicle depreciation is a key factor to consider when taking out a car loan or car credit. Calculating depreciation helps you better understand the future value of your vehicle, anticipate costs, and plan auto financing that fits your needs. Whether it’s a new or used vehicle, depreciation directly impacts the residual value, and therefore, how you structure your car loan.

3.1 The depreciation curve: early years vs long term

Vehicle depreciation does not occur in a linear manner. It is particularly pronounced in the first few years after purchase. Typically, a new car loses between $15 and $30 in value in the first year, a rapid decline that continues over the first three years. After this initial period, the rate of depreciation slows, but the vehicle continues to lose value, albeit less dramatically.

Example: If you buy a new car for $40,000 with a car loan, its value could drop to around $30,000 after the first year. After three years, it could be worth around $22,000. After five years, the car could sell for around $15,000. If you finance such a vehicle with a car loan over a six or seven year period, you could end up with a loan balance that is higher than the value of the vehicle for a good portion of the life of the car loan.

Understanding this depreciation curve is crucial to determining the optimal length of your car loan. A car loan that is too long could leave you in a negative equity situation, where you owe more on the car loan than the car is actually worth. Opting for a shorter loan or making a larger down payment can reduce this risk.

3.2 Methods of calculating depreciation (initial cost vs. residual value)

There are several methods to calculate the depreciation of a vehicle, but the most common is to compare the initial cost of the vehicle with its residual value. The residual value is the amount you could get by selling the vehicle after a certain number of years. Depreciation is therefore calculated by subtracting this residual value from the initial cost.

Method 1: Depreciation in percentage per year
A simple way to calculate depreciation is to use an average annual rate of depreciation. For example, if a vehicle loses approximately $20 billion in value in the first year, $15 billion in the second year, and then $10 billion per year for the following years, you can estimate the value of your vehicle by applying these percentages. This method can be useful for estimating the term of the car loan.

Method 2: Predictive models based on make and model
Some vehicle brands are known for having better residual values than others. For example, models like Toyotas or Hondas depreciate less quickly than luxury cars like BMWs or Audis. When financing cars on these reliable brands, it may be easier to plan for a higher residual value, and therefore structure a longer car loan or one with lower payments.

Real-world example: If you buy a Toyota Corolla for $30,000, you might estimate that after five years its residual value will be around $50 of the purchase price, or $15,000. On the other hand, a luxury car like an Audi A6 might only have a residual value of $40 after five years, or around $24,000 on an initial purchase price of $60,000. This difference in depreciation will directly influence how you structure your car loan.

3.3 Concrete examples of depreciation of different brands

Depreciation rates vary greatly between makes and models. Some cars hold their value better than others, which directly impacts how you choose your car financing. Here are some real-world examples to illustrate these differences:

• Toyota Corolla: Toyota cars are known for their high reliability and low maintenance costs, which allows them to retain a higher residual value. A Corolla purchased new for $30,000 could be worth around $18,000 after three years, with depreciation of around . This means that if you finance this car with a five-year car loan, the resale value could be higher than the outstanding balance.
• Honda Civic: Another example of a vehicle that depreciates less quickly. A Honda Civic purchased for $28,000 could be worth about $17,000 after three years, representing a depreciation of about $39,000. A car loan on this type of vehicle could be structured over a longer period of time without risking too much loss in value.
• BMW 3 Series: Luxury cars like the BMW 3 Series tend to depreciate faster. A BMW purchased for $60,000 might be worth just $30,000 after three years, with a depreciation of $50. If you’re financing this type of vehicle with a car loan, it’s essential to plan for a shorter loan term and perhaps increase your down payment to avoid ending up with a loan balance that’s higher than the vehicle’s value.
• Nissan Leaf (Electric): Electric vehicles can also depreciate quickly due to rapid technological change. For example, a Nissan Leaf purchased for 40,000 $ could be worth only 20,000 $ after three years. The rapid decline in battery values and the introduction of new, more efficient technologies influence depreciation. A car loan on an electric vehicle must take this volatility into account and may require more flexible car financing terms.

The depreciation of a vehicle plays a crucial role at the time of resale, whether you financed the purchase with a car loan or a car loan. Understanding how residual value is affected by depreciation will allow you to maximize the amount you can get at resale and better anticipate your car financing needs. This aspect is also essential to avoid situations where the market value of your vehicle is less than the remaining balance owed on your car loan.

4.1 Residual value and resale on the second-hand market

Residual value is the estimated value of your vehicle at the end of the period of use, usually after the term of a car loan. The higher a vehicle's residual value, the more advantageous it will be when reselling it on the used market. Rapid depreciation of a vehicle, on the other hand, can significantly reduce this value, directly affecting the amount you will get when reselling your car.

Example 1: Let's say you buy a new Honda CR-V for $35,000 with a five-year auto financing plan. After five years, its residual value could be around $50, or $17,500. If you opted for a car loan with a proper repayment plan, you could finish paying off your car loan and still sell the vehicle for a good price.

Example 2: On the other hand, if you finance a luxury vehicle like an Audi Q5 for $60,000, its residual value could drop to just $40,000 after five years, or $24,000. This means that if you still owe $30,000 on your car loan after five years, you would find yourself in a situation where the vehicle is worth less than the amount owed. This situation, called negative equity, is something to avoid and can be anticipated by choosing a car loan with higher payments or a shorter term.

4.2 Influence of automotive market trends

Automotive market trends also play a key role in determining the residual value and resaleability of your vehicle. Changes in demand for certain types of cars, technological advances, or fluctuations in fuel prices can influence the demand for certain vehicle models on the used car market.

Example 1: Electric vehicles are gaining popularity due to the growing demand for eco-friendly cars. If you finance an electric car with a car loan today, its resale value could be higher in a few years, especially if technology advances slowly. However, if major innovations make older models obsolete, this could accelerate their depreciation.

Example 2: Conversely, cars with gasoline engines may see their demand drop if fuel prices increase or environmental regulations become stricter. If you finance a gasoline-powered SUV with a car loan, the depreciation could be greater because of these market changes. In this case, it may be wise to opt for car financing over a shorter period to avoid the vehicle losing too much value before the end of the car loan.

4.3 Strategies for Maximizing Resale Value

To maximize the resale value of your vehicle and minimize the effects of depreciation, it is important to implement certain strategies before and during the auto financing period. Here are some tips to optimize the value of your car when you resell it on the used market:

1. Choose brands and models with low depreciation: As mentioned earlier, some brands like Toyota, Honda or Subaru have a reputation for reliability that allows them to retain a higher residual value. When choosing a vehicle for a car loan, opting for a reputable brand can help you reduce the effects of depreciation and get a better resale price.
2. Maintain good maintenance: Regular, documented maintenance helps maintain the value of your vehicle. Missed major repairs or lack of maintenance can significantly reduce resale value. If you finance a vehicle with a car loan, be sure to follow recommended maintenance intervals to protect your investment. Real-world example: If you finance a Honda Accord with a five-year car loan, keeping your maintenance records up to date and keeping the car in good condition will help you sell the car for a higher price at the end of your car loan.
3. Limit Mileage: High mileage is a major factor in depreciation. If possible, try to limit the number of miles driven, especially if you plan to resell the car within a relatively short period of time. If you finance a vehicle with a five-year car loan, the less you drive, the higher its residual value will be when you resell it.
4. Avoid custom modifications: While cosmetic or mechanical modifications may seem appealing, they can actually reduce resale value. Potential buyers in the used car market typically prefer vehicles that have remained close to their original condition. If you are financing a car with an auto loan, keeping the vehicle in its standard condition can help maintain its value.
5. Planning the Right Time to Resell: It is important to resell your vehicle before it loses too much value. For example, cars depreciate rapidly in the first five years, but after six or seven years, depreciation slows down. If you sell your vehicle too late, it may no longer have significant value. By structuring your car financing correctly, you can plan for resale when the residual value is still relatively high.

When purchasing a vehicle, it is essential to consider how to minimize depreciation to protect your investment. Depreciation is inevitable, but there are several strategies to limit its impact, especially if you have taken out a car loan or car financing. By making the right decisions at the time of purchase and during your ownership period, you can minimize the loss of value of your car and maximize its resale potential.

5.1 Advantages of buying a used vehicle

One of the most effective ways to minimize depreciation is to opt for purchasing a used vehicle instead of a new car. This is because new vehicles experience their greatest depreciation in the first few years after purchase. When you finance a used vehicle with a car loan, you avoid this rapid depreciation phase.

Real-world example: Let’s say you buy a new car for $40,000 with auto financing, after three years it might be worth only $22,000. If you buy the same car used after three years, you pay $22,000 and finance that amount with a car loan. By buying a car after the initial depreciation phase, you reduce the risk of negative equity (where you owe more on your car loan than the car is worth).

Used cars also offer better stability in terms of residual value. This means that if you opt for car finance on a used vehicle, you are less likely to see the value of the car drop drastically, making it easier for you to resell the car at a reasonable price.

5.2 Choose brands and models with low depreciation

Not all cars depreciate at the same rate. Some makes and models hold their value better than others. Choosing a car that is known for its reliability and popularity on the used car market can help minimize depreciation. Brands like Toyota, Honda or Subaru are often cited as examples of vehicles with low depreciation.

Real-world example: A vehicle like a Toyota Camry or Honda Civic has a much higher residual value compared to a luxury car like a BMW 7 Series. If you finance a Toyota with a car loan, its value will hold up better over the years, making it easier to resell and limiting losses due to depreciation.

By choosing a reliable brand for your car financing, you also ensure that you benefit from lower maintenance costs, which can also influence the resale value. Therefore, a car loan on a well-rated car is often a better investment in the long term.

5.3 Importance of regular maintenance

Regular maintenance of your vehicle is a key factor in minimizing depreciation. A well-maintained vehicle, with a complete maintenance history, not only has a longer lifespan, but also retains a higher value. If you are financing your car with a car loan, it is crucial to follow the manufacturer's recommended maintenance intervals to protect your investment.

Case in point: If you bought a Honda CR-V with a five-year car finance agreement, make sure to keep your oil changes, filter changes, wheel alignments, and other regular maintenance routines. This will help ensure the car remains in good working order and preserve its residual value. If you do decide to resell it, having up-to-date maintenance records can help you get a better price, which will reduce the impact of depreciation on your car loan.

Additionally, if you plan to resell the car before your car loan is up, a good service history can attract more buyers to the used car market because they will know that the vehicle has been well maintained, which increases its perceived value.

5.4 Impact of options and accessories on depreciation

Options and accessories added to a vehicle can have an impact on its depreciation, but not always in a positive way. Some options, such as navigation systems, leather seats or advanced safety systems, can increase the resale value of the car. However, other cosmetic modifications or overly specific customizations can on the contrary decrease the value of the car on the used market, because they do not meet the preferences of the majority of buyers.

Case in point: If you’re financing a car like a Subaru Outback with an auto loan, adding options like a sunroof or a premium audio system might slightly increase its resale value. However, if you customize the car with specific accessories like oversized wheels or a unique body kit, it might reduce the interest of potential buyers when it comes time to resell because those modifications may not match their tastes or needs.

It is therefore important to think carefully before adding options and accessories to a car that you have financed with a car loan. Preferably opt for additions that are widely requested on the used car market and that provide real added value in terms of comfort or safety.

When taking out a car loan or car credit, it is essential to understand how depreciation impacts the value of your vehicle and the terms of your car financing. Depreciation not only affects resale value, but can also pose financial risks if not properly anticipated. It is therefore important to carefully plan your car loan based on depreciation to avoid finding yourself at a disadvantage in the long term.

6.1 Link between depreciation and auto financing

The link between depreciation and auto financing is fundamental because depreciation determines the future value of your vehicle and can influence the structure of your car loan. As soon as a vehicle leaves the dealership, it begins to lose value. This decrease in value directly impacts your car loan because if the car depreciates too quickly, you could find yourself in a situation where the value of the car is less than the amount you still owe on your car loan.

Real-world example: You finance a new $40,000 car with a six-year auto loan. After two years, the car could depreciate to just $26,000. If you still owe $32,000 on your auto loan, you’re in a negative equity situation, meaning you owe more than the car is currently worth. This can be problematic if you want to sell or trade in your vehicle before your auto loan is up.

6.2 Car loan and “residual value”: explanation of the terms

Residual value is the estimated value of your vehicle at the end of the financing period. It is a key factor to consider when taking out a car loan or car credit because it determines how much you will be able to sell your car for at the end of the period of use. The higher the residual value, the less impact depreciation will have on your financial situation.

When getting a car loan, it is essential to choose a car with a good residual value, so that you do not find yourself in a situation where depreciation exceeds the rate at which you pay off your car loan.

Example: A vehicle like a Honda Civic, which is known for its reliability, may have a higher residual value compared to a luxury car like a Mercedes-Benz E-Class. If you finance the Honda Civic with a car loan, its resale value will likely still be high after five years, making it easier to trade in or sell to pay off your car loan balance.

6.3 Loan on a depreciated vehicle: financial risks

One of the biggest financial risks associated with a car loan is borrowing against a vehicle that depreciates quickly. As mentioned, if the value of the vehicle drops faster than your car loan repayments, you end up with more debt than the vehicle is worth. This can cause difficulties if you want to sell or trade in your car before you have paid off your car loan in full.

Example: Let’s say you finance a luxury car for $70,000 with a seven-year auto loan. After three years, the car may be worth $35,000, but you still owe $45,000 on your auto loan. That means you’ll need to come up with an additional $10,000 if you want to trade in or sell the vehicle before the auto loan expires. This creates significant financial risk, especially if the economy changes or your needs change.

6.4 Consequences of depreciation on the term of the loan

There duration of your car loan has a direct impact on how depreciation affects your car financing. The longer the term of your car loan, the more likely you are to see your car lose value faster than you pay off the loan.

Example: If you finance a car with a seven-year auto loan, you may find yourself in a situation where the value of the vehicle drops faster than the amount remaining on your loan. This can make it difficult to trade in or resell it before the end of the auto loan term. On the other hand, if you opt for a shorter auto loan term, such as five years, you will pay off the amount owed more quickly and reduce the risk of going into negative equity.

Choosing a car financing term that matches the vehicle's depreciation curve is essential. This allows you to ensure that the residual value of the car will not fall below the amount remaining on your car loan before the end of the repayment period.

6.5 Car Insurance and Depreciation: Market Value Coverage

Car insurance plays a crucial role in protecting against depreciation, especially when you finance a vehicle with a car loan. If your vehicle is stolen or totaled, insurance companies typically only cover the current market value of the vehicle, which takes depreciation into account. This means that if you still owe more on your car loan than the car is currently worth, you could be on the hook for the difference.

To avoid this risk, many buyers opt for replacement insurance or gap insurance (Guaranteed Asset Protection), which covers the difference between the market value of the vehicle and the remaining balance due on your car finance.

Example: If you took out a car loan on a new car for 50,000 $ and after two years the car is stolen and is only worth 30,000 $, gap insurance will cover the difference of 20,000 $ that you still owe on your car loan. This saves you from having to pay off a loan for a vehicle you no longer own.

Vehicle depreciation is an inevitable phenomenon that can have a significant impact on your car loan or car financing. However, there are several strategies and solutions to counter its effects, in order to protect yourself financially and maximize the value of your investment. Here are some practical solutions to minimize the impacts of depreciation on your car loan.

7.1 Choose a loan adapted to depreciation (duration, rate)

One of the best ways to combat depreciation is to choose a car loan that is appropriate for the rate at which your vehicle will lose value. This includes the term and interest rate of the car loan. It is essential not to take out a car loan with too long a term, because the longer the loan is, the more likely you are to owe more than the car is worth at any given time (a “negative equity” situation).

Example: If you finance a new car with a seven-year auto loan, you may see the value of the vehicle decline faster than you pay off the loan. Instead, a five-year auto loan may be a better fit. You'll pay a little more each month, but it'll better track the car's depreciation curve and prevent you from owing more than its value on the used car market.

By choosing the duration and rate of your car loan carefully, you limit the risks associated with depreciation and you facilitate the resale or exchange of the vehicle before the end of the car loan.

7.2 Advantages of a higher initial contribution

Another effective way to counteract the effects of depreciation on your car loan is to take out a initial contribution higher when purchasing the vehicle. By paying a large amount up front, you reduce the capital to be financed, which allows you to limit the risk of negative value and better control the amortization of your car loan.

Example: If you buy a $35,000 car and put down $10,000 as a down payment, you will only need to finance $25,000 with a car loan. Even if the car loses $20,000 in value in the first year, or $7,000, you will still be in a favorable position because the remaining amount on your loan will be well below the current value of the vehicle. This strategy is especially effective if you are financing a new vehicle, which typically experiences significant depreciation in the first few years.

By reducing the amount you borrow, you also reduce the amount of interest you pay on your car loan, making the overall auto financing more cost-effective.

7.3 Leasing and depreciation: advantages and disadvantages

Leasing or rent-to-own (LOA) is an alternative to traditional car loans that can help you better manage depreciation. By opting for a lease, you rent the vehicle for a set period of time, paying only for the value it loses during that time. At the end of the lease contract, you have the option to buy the car back at its residual value or return it.

Advantages: The main advantage of leasing is that you don't have to worry about long-term depreciation, as you only pay for the period you use the vehicle. In addition, you can change cars regularly, thus avoiding having to manage the sale of a vehicle that has lost a lot of its value.

Cons: Leasing does have some drawbacks, though. First, you don't own the vehicle until you buy it out, and if you decide to buy it out at the end of the contract, the total cost could be higher than with a traditional car loan. Additionally, leases often have mileage restrictions and can incur additional fees if those limits are exceeded.

Example: If you lease a car for 40,000 $ for three years, you will pay based on the estimated depreciation during that period. If the residual value is 22,000 $ after three years, you will only have to pay for the difference, which is 18,000 $. This can be an interesting option for those who want to limit the effects of depreciation without committing to traditional car financing.