Wednesday, August 22, 2007

Depreciation of Cars?

I was wondering what is the depreciation costs of cars really? Is it worth to buy used? I think it is, but how used? Is it worth it to buy a 1, 2, or 3 year old car or more? What depreciation hit has our two cars taken?

First I bought a 1999 Toyota Corolla VE brand new. It was $11k when purchased, and current resale according to KBB private party sale good condition $4895. Hence the depreciation was 55.5% over 8 years equalling 6.94%/year. That's not terrible, but most of the depreciation was probably done in the first 1-3 years rather than a set rate each year.

Our second car is a 2000 Ford Focus which was purchased for $14k and is now worth $4775. It took a 65.9% depreciation hit over 7 years. That equals 9.4%/year. Which shows a difference between american and japanese cars.

I was told we don't drive very fancy cars, but the truth is that I can't seem to justify even buying a used car because it'll cost too much. For instance a used Toyota Highlander is probably what we would get. But don't worry this is probably 2-3 years out if not longer.

Right now according to KBB if we bought a new 2007 Highlander it would cost $23.5k, but a 1 year old used 2007 would cost about the same. Ridiculous. Why would anyone buy a 2007 model when the 2008s are coming out and the new 2007 costs the same? I did the exact same models and trim of SUV.

So I thought maybe the older models. A 2006 Highlander according to KBB should be $19805 or a 15.7% hit for one year. A 2005 Highlander would be $16675 or 28.6% less, while a 2004 Highlander would be $14510 or 38.2% less. And so forth until 2001 when the Highlander was first introduced.

I plotted this on a graph and determined the slope of the trendline was -8.76%, so the car depreciated on average about 9% a year. But the biggest slopes were in the first 2 years, after that it appeared to depreciate at the same rate.

So I guess if I were to buy a car I'd buy a used car of at least 2 years. Although you never know, so I'll address it when we have to buy a car.

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