Personal Finance

Car depreciation is a budget killer. Here's how to avoid it

Key Points
  • The average cost to own and operate a new car is $9,282 a year, according to AAA.
  • Depreciation alone accounts for more than $3,000 a year.
  • Here's how to avoid those hefty depreciation costs.
Keeping car value
Keeping car value

Considering insurance, gas, maintenance and repairs, most drivers are well aware of how expensive cars are to buy and maintain.

In fact, the average cost to own and operate a new vehicle is $9,282 a year, according to an annual study by AAA.

However, the largest expense that comes with buying a new car largely falls under the radar, the automotive group said.

How much does a new car depreciate?

Of all costs, depreciation, a measure of how quickly a car loses value, remains the single biggest cost of ownership, accounting for more than a third, or 36%, of the average annual cost, according to AAA.

New cars typically depreciate the minute you drive off the lot. By the time it's a year old, the vehicle has lost nearly one-third of its value, according to Edmunds data.

The secret to minimizing depreciation costs: "Keep your car for a long time and keep it well-maintained or even consider buying a quality, pre-owned vehicle," said Robert Sinclair, a spokesman for AAA Northeast.

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For those currently car shopping, in addition to the purchase price and the rate you'll pay to finance a car, consider the length of time you plan to own your car, Sinclair advised.

New car buyers who stretch a car loan over five, six, or even seven years may effectively lower their payments, but owners may end up owing more than the vehicle is worth.

How to avoid car depreciation

By buying a pre-owned vehicle in good condition, you can keep your costs way down over that time. (A certified pre-owned vehicle, usually one coming off a lease, often includes warranty coverage, which greatly reduces the worry that can also come with buying a used car.)

Five years of strong new car sales have created a large supply of "gently used" off-lease vehicles, and these are priced at a significant discount, according to Cox Automotive. Many potential new-car buyers looking for good value will be drawn into this used market, the company said.

About 35% of new cars are priced below $30,000, compared with 54% in 2012, according to another Cox Automotive report. Separate data from Edmunds show that the price of a 3-year-old used car — the age of most autos coming off leases — averages $13,535 less than a new car. In 2010, the difference was less than $9,000.

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