As soon as you drive your brand new car out of showroom, its value starts decreasing. What’s the reason for such fast depreciation?
In: Economics
At what price is one willing to buy a used vehicle instead of a new one? When interest rate on loan is higher, when warranty coverage is less, and what is wrong that it’s for sale again? And a dealer is going to offer wholesale because they have expenses and profits to cover in a sale. Maybe you could get more selling by yourself instead of trading in, but how many buyers have the cash to buy an almost new vehicle and are willing to buy off Facebook Marketplace, etc?
If you buy a new car from a dealership, it’s guaranteed to be perfect with the dealership, and ultimately the factory standing behind it. It hasn’t been used.
You don’t know what’s happened to a used car. Maybe a 16 year old owned it and used it to practice his Fast and the Furious cosplay. Maybe someone left the sunroof open and it filled with water that’s now rusting out the floors.
The reason cars depreciate so quickly is because cars wear down and have a limited lifespan. You have no guarantee the previous owner(s) took care of it well.
Many, many people abuse the crap out of their cars. People don’t like to buy other people’s problems, which drops the demand for used cars.
If I had the choice between a brand new car for $30k, and an identical car that’s 1 month old for $29k, I’d pick the new car 10 times out of 10 so I don’t have to worry about what kind of hell the previous owner put their car through in that month. I wouldn’t even consider the used car until the price dropped to more like $25k, and most other people feel the same way, which is why the value of your $30k car that you’ve only had a month is $25k.
Answer: Your question is outdated, and this is no longer true across the board. Buying certain in-demand vehicles can actually immediately increase in value due to demand far outweighing supply. Others may diminish in price so slowly that they later sell for more even if their relative value has decreased somewhat.
Source: I’m shopping for small trucks and the only new model is the Maverick, which people are reselling for 5-10k over the retail price, and older 15-25-ish year old models like the Toyota Tacoma or Ford Ranger can go for more than their MSRP if they’re in decent shape.
>As soon as you drive your brand new car out of showroom, its value starts decreasing. What’s the reason for such fast depreciation?
The value in the showroom isn’t the true value of the car. It is an over-inflated value; the value of the prestige of newness. Once the “new” wears off, the car drops to its true value.
This is not as true as it once was, but a big driver of this is a risk discount. The buyer knows there is a risk something is wrong with the car, and as compensation for that risk, they expect to pay less. At a price close to the original price, the buyer would rather remove the risk and buy new.
Think about an iPad on Craigslist that was $500 at retail that somebody has had for a month and they are selling for $450. Is saving $50 worth the risk of there being something wrong with it and having no way to return it? Many would say no.
Now consider the fact that people can do tons of things, visible and invisible, to mess up their cars. The risk, and thus the risk discount, go up considerably.
Interestingly, [some economists are amazed that the used car market functions at all](https://timharford.com/2006/04/any-colour-you-like-as-long-as-its-lemon/). Sellers who know their cars are in good shape shouldn’t be willing to sell at a discount, and in turn the only cars that sellers should be interested in selling are ones that are in worse shape than the going price.
It doesn’t always lots of cars stay the same or even go up in value depends on the demand and reliability of the model….
Lookup “market for lemons”. A car is complicated and it’s difficult for a buyer to know what’s wrong with the car. The seller knows what’s wrong but won’t always be honest. So you’re taking a risk as a buyer.
When it’s new, you know there isn’t any damage / issues caused by wear or abuse. Also there’s a warranty.
Market forces may dictate used prices to be higher than new prices, though. But that’s the exception.
Well I paid 17k for my used car, the dealer sent me the wrong paperwork and I saw they bought it at an auction for 8k so I’d say a lot of the depreciation is due to all the dealer mark ups
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