Car depreciation

[jIM_Ohio]

Curious how the others here value the purchase price of a car, and how quickly (or not quickly) they depreciate.

Also curious if the milage you put on the car changes that outlook.

I go thru some detailed math when deciding new or used... you have to know the value of the car to you, as well as the value of the car on the open market.

Here is what I mean-

For any car purchase I think about two things

1) What is a reasonable market price (purchase price) for the car.
2) What is the expected life of the car, and how much value does that have for you

For #2, I factor in maintainance costs and replacement costs.
I then always compare two vehicles so I know if value is aligned to the market


Here is what I mean (this is true story from my negotiating skills from 2 weeks ago)- all vehicles below are honda, just different models of some sort:

My wife found 2 vehicles on a used car lot she considered:
One is 3 years old (2008 model year), has 50k miles and is priced at 25k
One is 3 years old (2008 model year), has 33k miles and is priced at 27k

The models are the same, but the 33k car has some extra features (like navigation). What I ask myself is this

for 17k miles is it worth $2000. H$#77 yes! $2000 for one year of car usage is significant. I tried talking wife into lower milage car, but she wanted the other one for a few reasons.

As we sat and haggled on the price I learned a few things- how I valued the car and how the dealer did things was "much different".

I valued the car at $18,500- because over 3 years that would cost me just over $550/mo, and we were replacing a car which was costing us $430/mo with 100k miles on it already (2008 model year). My offer was rejected, and haggling got the price of the vehicle to 21k. 21k was a payment of just over $600/mo for 3 years.

So at this point my choices were
$430/mo on a car we did not want for 24 more months- this car probably had about 5 years of use in it (100k miles now, 20k miles per year, accord, so 200k lifetime can be expected)
$600/mo on a replacement (larger) vehicle for 36 months (50k miles on it now, dealer admitted getting 200k miles on a pilot is not common, so probably 100k miles left at 20k per year).

I then asked about a new pilot- and what the costs were. The vehicles used were NOT the same exact model- the new one had the DVD player in it ($1800 add on) and a few other options not in the used ones which were on the lot. MSRP on the add ons was probably about $3000 worth of options.
MSRP on the pilot model wife wanted was about $39,000. I talked them down to $34,000 on same vehicle and the cost was about $700/mo (3.9% financing).

In addition, at the 34k price, the dealer was able to take all 9k left on existing car loan, and remove it from the books (blue book on accord was less than 6k, it was about $4000 of negative equity).


So now I put 3 vehicles on the decision matrix...

current accord $430/mo for 2 more years, 100k miles left on it (5 years)
used Pilot $600/mo for 3 years, 100k miles left on it (5 years)
new Pilot $700/mo for 5 years, 150k miles on it (5-10 years)

To me it was a "no brainer" to pay $700/mo for 2 years to get 4-10 more years out of the vehicle than the other 2 choices.

On paper the new car depreciates, but if I have to turn around in 3-5 years and replace a vehicle, how fast something depreciated is less a concern than what it cost me to depreciate the car. We chose the new pilot because the incremental cost to us was much cheaper- we have a vehicle we know we can keep for 7 years and probably longer (Our other car is a honda ridgeline, so when it dies in 5-6 years, I can use the pilot, drive it less, and get my wife a replacement which she will drive into the ground.

**wife drives 20k miles per year for work so she will depreciate any vehicle she drives faster than normal, OTOH I drive very little- so I can take her hand me downs and get 3X the life out of them (if she gives me a car with 100k miles on it, I can make that last 5-10 years probably).

Curious how others see the problem?

[DrSavin]

That seems like a pretty good way to look at things.

My only thought process is How much am I paying for the car? How long will it last?

So, (Price of the Car)/(years car will run) = True price

Do this to any vehicle and compare their True prices. The cheaper vehicle wins every time.

[disneysteve]

current accord $430/mo for 2 more years, 100k miles left on it (5 years)
used Pilot $600/mo for 3 years, 100k miles left on it (5 years)
new Pilot $700/mo for 5 years, 150k miles on it (5-10 years)

Given these 3 choices, I would absolutely pick the first option: the lowest payment for 2 more years and then 3 years payment-free. Of course, that's coming from a guy who owns a 1998 Camry and a 2000 Sienna, both bought used, both with over 130,000 miles and both with no intent to replace anytime soon. I drive my Camry about 10,000 miles/year so I'm hoping for 5-6 more years out of that. We do about 15,000 or so on the Sienna, so maybe 3-4 years on that.

When it comes time to replace them, we'll look for similar deals: about 2-3 years old, reasonable mileage and well maintained.

[jIM_Ohio]

Given these 3 choices, I would absolutely pick the first option: the lowest payment for 2 more years and then 3 years payment-free. Of course, that's coming from a guy who owns a 1998 Camry and a 2000 Sienna, both bought used, both with over 130,000 miles and both with no intent to replace anytime soon. I drive my Camry about 10,000 miles/year so I'm hoping for 5-6 more years out of that. We do about 15,000 or so on the Sienna, so maybe 3-4 years on that.

When it comes time to replace them, we'll look for similar deals: about 2-3 years old, reasonable mileage and well maintained.

Keeping accord was a problem (so it was on list as a choice, but it was not really what she wanted)- neither of our cars could seat 5 people with 2 car seats, and that was a problem when company came and we had to take kids somewhere. Pilot has 3 rows of seats and either 6 or 7 seat belts, so now when company visits we have one vehicle everyone can ride in.

Had I known this 4 years ago when we purchased accord, I would have told wife to pick the Pilot then. But who knew?

I agree keeping accord would have been less out of pocket, but that also would have been 5-7 years of wife complaining when company came that we cannot all ride in same car.

[DrSavin]

...I agree keeping accord would have been less out of pocket, but that also would have been 5-7 years of wife complaining when company came that we cannot all ride in same car.

All the money in the world isn't worth the naggings of one's spouse...

[thekid]

about 2-3 years old, reasonable mileage and well maintained.

I think that's the best bet and value.

My wife does that and upgrades back up every 5-6 years or so (so when car gets about 8 years old).

I bought new last time, because, well, I felt like it. I've had it for over 5 years and intend to keep it for 3 more years or so. My average yearly cost will awas be higher than if I bought a 2 year old, but I knew that going in.

As for what the true cost of a car is, I'd venture the following formula:

[Purchase price + (estimated) maintenance + financing - Resale Price] / years of use.

Newer cars will have higher financing costs (if financed) but lower expected maintenance costs. After the first 2-3 years, depreciation steadies on a per year basis. Hence, why I think there is a sweet spot for 2-3 year old cars (espcially if purchaser doesn't need financing).

[DrSavin]

Definitely, the kid.

You always have to factor in oil changes, set up savings for maintenance, and, if you haven't paid cash, factor in the interest charged on you from financing. As for resale...hehe...I drive my cars until they aren't.

[disneysteve]

Keeping accord was a problem (so it was on list as a choice, but it was not really what she wanted)- neither of our cars could seat 5 people with 2 car seats, and that was a problem when company came and we had to take kids somewhere.

I agree keeping accord would have been less out of pocket, but that also would have been 5-7 years of wife complaining when company came that we cannot all ride in same car.

Understood. There are a lot of non-financial factors involved when buying a car that we all factor in - size of family, size of individuals (I have one friend who is 4'10" who can't see over the wheel in some cars; I have another friend who is 6'8" who can't fit in many cars), number of car seats, dogs, distance of commute, type of work you do, safety concerns, weather patterns in your area, etc. Life's too short to drive a car you hate. Surely, if you look around, you can find a car you like on virtually any budget.

I'm not sure what my next car will be. I've had a Camry for the past 19 years but I don't like the new redesign so much. I may get one anyway because I hate the whole process of car shopping, but I might look around a bit. Depends on my mood at the time.

[jpg7n16]

Curious how the others here value the purchase price of a car, and how quickly (or not quickly) they depreciate.

Also curious if the milage you put on the car changes that outlook.

My thoughts are along the lines of DrSavin's.

Estimate the amount of miles you can put on the car. Estimate how many miles you'll put per year. Calculate expected life of the car.

Evaluate total cost vs salvage value over that time to determine average cost per year.


I almost think of it as "how many miles would I be buying?"

So now I put 3 vehicles on the decision matrix...

current accord $430/mo for 2 more years, 100k miles left on it (5 years)
used Pilot $600/mo for 3 years, 100k miles left on it (5 years)
new Pilot $700/mo for 5 years, 150k miles on it (5-10 years)

To me it was a "no brainer" to pay $700/mo for 2 years to get 4-10 more years out of the vehicle than the other 2 choices.

But it wasn't $700/month for 2 years, it was for 5 years.


Assuming all cars have some salvage value: (since your expectaions are 20k miles/year and Pilot reaches salvage value at 150k additional miles = 7.5 years)

If you kept the Accord, you'd pay out $10,320 and have a salvage value of $1k = total loss of 9,320 over 5 years. (Avg loss per year is $1,864)

For the New Pilot, you'd pay out $42,000 and have salvage value of $1k = total loss of $41,000 over 7.5 years. (Avg loss per year is $5,466; even if 10 years, it's $4,100/year)


Easy math would say, you could keep a $6k car that will last 100k miles ($0.06 per mile), or purchase an additional 50k miles for another $11k + finance charges (I'm netting out debt "forgiveness" of 4k from the dealership)

The marginal cost of those extra miles is high by comparison in this case. ($0.22 per extra mile purchased; 3.6x the accord)


I don't see how you came to the conclusion that a $21k car would be a better financial deal than your current model. I also don't understand why you evaluated the decision based solely on your monthly payment, instead of the overall purchase price.



I do agree that the Accord didn't meet your needs best, but your financial analysis of this seems off to me.

[jIM_Ohio]

I do agree that the Accord didn't meet your needs best, but your financial analysis of this seems off to me.

My goal was to recover the car payment as fast as possible and see it accumulate money as fast as possible over next 14 years (and put it into budget as savings and not an expense). What I had to do was keep car payments to a minimum (meaning stop financing a car we did not want). I want to pay cash for a car, but with wife putting 20k miles on car per year, that is a lot of strain on budget to continually replace used vehicles once they hit about 120k-150k miles, plus we need a bigger family car.

My wife's expectation was once accord was paid off, she was getting its replacement (she was not going to drive accord into ground, she wanted the pilot and wanted one for last 4 years- she wanted the pilot when she got the accord but other reasons suggested she did not get it).


My timeline looked like this

a) pay $430/mo on accord knowing we were getting rid of it- meaning my #1 issue was why have a car payment on a car we don't want. It had 24 months left of payments on it.

b) pay $600/mo for 3 years on used pilot- this cost was really 1 year and $170/extra per month- because I was already "locked in" for $430, I was valuing the $170 payment difference as my delta (not the total payment, just the delta). Problem with this was:

i) after this car payment was paid off, I would have $600/mo available in budget for "maybe" 24 months ($14400) and probably less (1 year=$7200) and that did not change my investing strategy enough to make a difference.

ii) The pilot we financed would be replaced with another car payment because that $14,400 would not get a car which could take 20,000 miles/year and this does not even factor in the fact my truck is probably going to be replaced in same 5 year-7 year timeframe (I have a 2008 ridgeline which I estimate need to replace in 2018-2022).

c) pay $700/mo for 5 years on new pilot. Using same logic as #2:

i) after this car payment was done I KNOW for certain we have $700/mo available for probably 4 years, could be 6-8, so $33,600 can be saved/invested over those 4 years. and possibly double that if it lasts 200k miles (not likely, but we have that chance).

ii) The pilot we financed will never be replaced with another car payment, because once paid off, that money goes to savings and its the next car purchase plus extra. It was $270/mo per month, for another 3 years beyond when the accord was paid off (so again I am evaluating the delta more than just the cost of the pilot).

d) The best case situation was pay off the accord and invest that $430/mo until either car needed to be replaced- big wildcard was this- wife cut a few things out of "her side" of the budget to reach the $270 delta she needed to make it work (I could NOT invest that $270/mo right now if I wanted to) where as she was willing to make cuts to get the item she wanted.

i) the financial advantage to me is she committed to letting me roll the entire $700/mo payment into savings once her pilot was paid off in 5 years. So I was weighing - $430/mo in 2 years vs $700/mo in 5 years, and I liked the $700 number much better.

**edit to add**
I know by any way someone crunches the numbers I am probably depreciating the heck out of both the accord which we don't have anymore, and the pilot (whether we bought new or used). The way I crunched the numbers was spending just decreased by $270 (wife made some cuts) while at same time in 5 years I get to increase savings rate ($8400/year is about 5-7% of gross pay). So the decision was keep spending the same and save $430/mo vs spend $270 less and save $700/mo in 5 years.

If the $430/mo plan was used, wife wanted some of my "truck payment"- which was $700/mo, but I had already converted that to more investments and savings in "my plan", so part of this has a bigger compromise not shown in any of the posts.

[am_vanquish]

The process DW & I just went through tried to account for both financial and non-financial factors, so it might not be what you're looking for. Still, it worked for us.

We created categories by which we could score the "value" of the car in several different areas. The categories ranged like the following:
Financial Categories: depreciation, maintenance, repairs, insurance costs, etc.
Car Specs: safety features, fuel efficiency, reliability/expected future lifetime, size, etc.
Non-Financial Factors: amenities, aesthetics, comfort (DW has same complaint as wife b/c we have to take separate cars when company comes to town).

Every car option was assigned a value of 1-10 for categories in financing and car specs, and 0-5 for non-financials (they shouldn't count as much because they're generally wants rather than needs). Some of the values were objective based on research, some were subjective based on our impressions. Each decision-maker (me and DW) got to spread around a 25% multiplier to add weighting to categories we thought were important (DW put hers on size, mine went to expected future lifetime & maintenance).

Now, obviously we could sway the results with subjective ratings, but the system worked pretty well for us by helping us identify the items we personally placed a value on. It was helpful to organize the tremondous amount of information we were taking in.

[GREENBACK]

I apologize if I missed this but one guaranteed higher expense with a newer vehicle that so often gets overlooked is what kind of insurance you're now required to have. This can boost your costs significantly.

[investingnoob]

Great choice. Hondas run forever, top value, and cheap maintenance than most. My brother n law had a pilot and loved it. plus they hold their value.

[Beccagold]

Keeping accord was a problem (so it was on list as a choice, but it was not really what she wanted)- neither of our cars could seat 5 people with 2 car seats, and that was a problem when company came and we had to take kids somewhere. Pilot has 3 rows of seats and either 6 or 7 seat belts, so now when company visits we have one vehicle everyone can ride in.

Had I known this 4 years ago when we purchased accord, I would have told wife to pick the Pilot then. But who knew?

I agree keeping accord would have been less out of pocket, but that also would have been 5-7 years of wife complaining when company came that we cannot all ride in same car.

Jim- While I agree that there are other circumstances involved, is it worth the additonal cost? Keep in mind your gas costs will go up to use a Pilot for 20kmiles/year, just to need additional seats on occasion.

My DH and I each drive our cars 20-25k miles/year. We keep one SUV and sedan. It makes no sense to pay the higher gas costs on both cars. If seating is an issue, drive 2 cars for the once in awhile it might be necessary.

Just a thought

[disneysteve]

If seating is an issue, drive 2 cars for the once in awhile it might be necessary.

I'd say it depends how often that happens. I know a few people who rent a car when they have the need to transport more people than they can in their vehicle. They might rent something 3 or 4 times a year for a day or two and occasionally for a week for vacation. That costs them a lot less than buying a bigger vehicle that they really only need a handful of times per year. Of course, if needing the bigger vehicle happens regularly, that wouldn't make sense and owning the bigger car would.