How to Avoid Depreciation in Your Car |
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Kari Hoopes
May 18, 2007
The average car will cost you between $650 and $850 a month because of the car payment, insurance, gasoline, and maintenance. The largest depreciating asset you will probably buy. There are ways to reduce these costs, but can you avoid auto depreciation altogether? There is little you can do to stop depreciation, though the one thing you can control is how much you buy your car for and somewhat how much you sell it for. Though the car is always depreciating, the effective depreciation (total loss over the time you own your car) can be minimized or eliminated by properly controlling your buy price, sell price, and time held.
Automobile price movement, like the stock market is stochastic: a combination of random price movements trending in a general direction. The price direction of a car is more predictable than the stock market: always downward, though you do get a slight increase in the summer months as more people are buying. As the price moves down, selling prices fluctuate quite dramatically above and below the average price. As a result, a car selling on average for $20,000 may represent a broad range of sales between $18,000 and $22,000 dollars. This standard deviation will increase as the price of the car increases and the supply of the car decreases. As a result, you will get a tighter spread in a Toyota Camry as compared to a comparably priced BMW.
So to eliminate the cost of your car, simply buy at the low end of the price spectrum and sell at the high end of the spectrum. This is exactly what dealers do, they buy your car at a low price and then sell you one of their makes at a higher price. They then trade yours to another dealer for one which fits best on their lot (the underworld of dealer auto auctions). If you trade in a BMW at a Lexus dealership, the dealer will probably sell that BMW at auction and buy a Lexus at auction, because they know that people are coming to their dealership to buy a Lexus. They can expect to turn cars quicker and for a higher price because of this. Having another car on the lot is competition. Dealers will usually lose some money selling the trade in at auction, but the cost is worth it.
This is not always the case, however. As long as a trade in is not on the selling lot it is not competing with their other cars. If they can get more money for the car and not lose regular business, they will offer this car to consumers. These cars are the ones you typically see being sold by dealers on Ebay or as internet only specials on their website. You should expect to pay book trade in value for one of these vehicles. Whether you buy privately or from the backlot of a dealer, either way you will probably pay less for your vehicle, meaning less effective depreciation over time.
To find these deals, know exactly what you want and then keep a close eye on internet listings, including ebay in your target area, you can also call up a dealership directly. Let them know you are from out of the area and are looking for a good deal on a specific car. If they don't have it, they may put you on a notification list, and will definitely check out the upcoming dealer auction listings. If they can buy the car at auction for less than you are willing to pay, they may buy it for you, because it is small but easy money for them.
Finding a good deal on a car is not so difficult for the patient buyer, but buying the car is only half the process. The next questions is how long should you keep the car? If you buy a car for $10,000 which you can logically sell for $12,000, then there is no depreciation until the selling price drops below 10,000 at which point it depreciates just like normal. Therefore, to completely eliminate the cost of owning the car, sell the car before this point. You will have effectively erased depreciation on the car. As a bonus, you may also be able to reduce maintenance costs because you can selectively choose cars which you know will not need predictable maintenance in the coming year (i.e. new tires, brakes, belts, etc.)
I personally buy and sell luxury cars annually. Luxury cars because prices flucutuate in a wider range; and annually because that is typically about the time it takes for a car to depreciate to my buying price. The best time of the year for me to sell a car is near the end of summer when annual prices are high; and buy 2 months later, when the market is flooded with new cars and used car prices are at their annual low. Drive this car for 10 months and resale at the end of summer. Keep a simple vehicle around to drive during that time you are looking for your next car.
This strategy is not for everyone; it reduces only about half the cost of owning a car and can take a lot of patience. If you enjoy owning different cars and trying new things, this strategy may be right for you.
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Kari Hoopes:
Editor of http://automotive.yourbetterbuy.com , writing articles to help people make better consumer and financial decisions.