How Residual Value Impacts Your Car-Buying Options

buying a car
Find the best car buying option for you

The most expensive part of owning a car is selling it. That’s when you learn just how much of a bite depreciation has taken. All cars and trucks depreciate, but some retain their value better than others. By understanding how this impacts your car-buying options you’ll be able to decide if you should buy used, or lease or buy a new vehicle.

Depreciation – The Hidden Cost

Late in 2012, Kelly Blue Book published data predicting that after five years the typical 2013 vehicle will be worth about 38 percent of its price new.

The great thing about a used car is that the previous owner bears this cost. Buying a car that’s three years old car gets you a vehicle with another nine years life remaining for almost half price.

Of course, there are downsides. Most new car warranties are only three years, so if something breaks the repair costs come out of your pocket. And second, you’re not going to get that great new car smell.

Getting into That New Car

With transaction prices averaging more than $30,000 according to Kelly Blue Book, a new car can seem out of reach. But if you’re trading in, what matters most is the difference between what you can get for your old car, and the price of the model you have your eye on. And suddenly we’re back to worrying about residual value again.

If you’ve been driving something that loses it’s value rather quickly, (look at leasing information provider ALG’s Depreciation Ratings to see how your vehicle fares), you might find the gap is too large to bridge.

Few people pay cash for their new car, most borrow the money. Of course, borrowed money has to be repaid with interest, and if you miss a payment or two the lender might take possession of your ride. But, when you make the final payment, the vehicle is yours, even though it’s only worth x% of what you actually paid.

Leasing Makes it Easier

With leasing, you’re only paying the difference between the price new and what the car will be worth at the end of the lease. So to take a quick example, if that $30,000 sedan will lose $13,500 over three years, that’s how much you’ll pay the leasing company (plus interest and some other charges).

If you don’t want to put a lot of money down, leasing is a great way to get into a new car. On the hand, at the end of the lease the car goes back to it’s real owner, the leasing company, leaving you with nothing.

Which is Best?

As auto website Edmunds explains, the total cost of a used car will always be less than that of one that’s new. If you want a new car, and there are many good reasons for doing so, leasing is more expensive than buying. At the end of the day though, the biggest single factor underlying the cost of a car is depreciation, so chose your next ride wisely.

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