Of all the costs of buying and running a car, depreciation is probably the biggest.
new cars are notorious for instantly losing some of their value the moment they drive off the dealer’s forecourt, and continue to depreciate most heavily in the first three or four years.
But right now we’re at a strange point where most used cars are effectively appreciating rather than depreciating assets.
In other words, the car sitting outside your home is probably worth more on the open market than it would have fetched a year, or even two years ago.
According to John Courage, head of equities at website Motorcheck.ie, his company’s market data shows that a three-year-old car today sells for the same price it is worth as much today as its two-year equivalent. old model would normally be exchanged for.
“It’s a strange and unique set of times that we live in.”
This has been attributed to a sharp tightening of new car supply and a sharp drop in used car imports from the UK which have practically dropped off a cliff since Brexit.
Not to mention supply chain issues caused by two years of Covid lockdowns and now the war in Ukraine.
However, Courage believes that this current state of affairs is unlikely to last forever.
The flip side of this is that it’s a seller’s market, so dealers won’t be inclined to offer any discounts on new cars right now.
In addition, you can expect a wait of between three and six months for the most popular new models.
“It’s a very good time to be a car owner, but not such a good time to be a car buyer,” said Paddy Comyn, spokesman for AA Ireland.
All of this means that if you need a new car, minimizing your losses from depreciation is probably the most profitable strategy for getting the maximum value out of it in the long run.
Here are some things to consider.
Consider brand and segment carefully
If you are looking to buy a new car with the intention of keeping it for 10 years or more, the natural inclination may be to go for the brands that fill the bestseller lists, which in Ireland tend to be dominated by brands such as Hyundai, Toyota, NissanVW and Kia.
However, according to Courage, there is little difference in depreciation between these brands, although they are likely to hold their value better than French or Italian brands.
Another way is to consider newer in-demand model segments.
Courage says the fastest-growing segment is “B-SUVs,” or small, compact SUVs, with nearly every manufacturer launching new models in recent years.
Also worth considering is the model’s current life cycle.
If you buy a car, even one with a traditionally strong residual value, and it is replaced by a new model before you sell it on, the car’s value may drop more sharply over time than a model that was launched relatively recently.
EV or ICE?
But another decision that can greatly affect your new car’s depreciation curve is whether you decide to go with an all-electric vehicle (EV).
Although still much more expensive to purchase than conventional internal combustion engine (ICE) cars, range anxiety is now much less of an issue for most EV buyers today thanks to vastly improved battery technology.
Comyn says the writing is on the wall for petrol or diesel-only cars, as the government has committed to banning the sale of such cars from 2030.
Future motor taxation is likely to be aimed at encouraging the purchase of electric cars and PHEVs (Plug-in Hybrid Electric Vehicles) and discouraging diesel and petrol ahead of the 2030 deadline.
Even mainstream hybrids—vehicles with both electric and gasoline/diesel engines that don’t need recharging—won’t cut it in the future, he adds.
Courage confirms that the value of EVs up to two or three years is certainly holding up well, but adds that the Irish market is generally too small to see big differences in car depreciation across the board.
“The only thing we see now is a continuation of the appreciation of used cars.”
Go for a PCP
A PCP is essentially a form of long-term car leasing in that, unlike a hire purchase (HP) deal, you will never own the car, so you only pay back the car’s depreciation rather than its full capital value.
With this in mind, taking out a PCP may not seem like the most logical strategy for beating write-offs. The important thing here is that the car’s residual value is guaranteed by the vehicle manufacturer.
This is known as the guaranteed minimum future value (GMFV), which is agreed at the start of the PCP deal.
So if the value of the car you choose in two and a half years is still close to what it is today, you will have more positive equity over GMFV to add another new car.
For example, at the end of your PCP period, your GMFV may be €10,000, but the car is actually worth €13,000, leaving you with an equity of €3,000.
In fact, anyone who took out a PCP deal two or three years ago will be sitting pretty due to the significantly higher open market value of used cars overall – provided they choose to return it and drive away with a new car on a new PCPs.
On the other hand, if the car’s open market value ends up being less than the GMFV at the end of the PCP period – say €7,000, you won’t be liable for the €3,000 loss.
Comyn recounts a piece of advice he recently gave to someone who specifically wanted a diesel SUV, even though diesels have fallen out of favor with buyers.
“I had advised them to take out a PCP as they were buying a large diesel SUV and I said they were better off letting the PCP financiers bear the risk of the residual value of that car.”
Take care of your car
Whether you’re buying your car with cash, an HP deal, a bank loan or a PCP, there’s a lot to be said for taking as much care of your car as possible so that it’s in the best possible condition when it’s time to trade in . .
Presenting a full service history and other evidence of expenses for maintaining and operating the car will stand you in good stead when negotiating a trade-in.
“We’re not good in this country at servicing our cars properly, spending a little money on maintaining them, especially as they get older,” Comyn said.
But the growing awareness of the need to live more sustainable lifestyles could lead more of us to take better care of our cars and keep them longer.
“Why pay over the odds now for a used car when technology has led to the situation where cars are better built and safer.
“Maybe just keep them on a little longer.”
Buying used can be the best bulwark against depreciation
Buying used is a great way to beat the worst of new car depreciation, especially if you don’t do a huge annual mileage.
If you’re buying, say, a three-year-old car, the advantage is that you’re buying a car that has suffered the worst of its depreciation but is still in good condition and probably has a valid warranty. Typically, the average car depreciation curve flattens out noticeably after four or five years, meaning the car will lose less value thereafter.
However, like new cars, it is currently a seller’s market, especially as Brexit has made importing used cars from the UK much less cost-effective, so finding used cars can be much more difficult.
But what is the ideal age to buy used if the goal is to stay ahead of depreciation? John Courage, equity manager at car history service Motorcheck, says his choice is to buy a car at four years old and trade it in every two years – for another four-year-old car.
His reasoning is that a four-year-old car will still be under warranty, so you can still benefit from the option of adding an extra year or two of warranty if you buy from a main dealer. “If I were to buy a Toyota or a Ford or a BMW, at four years old, I know it’s been taken care of, it’s been approved and it’s gone through a very, very rigorous process to make sure you’re buying a very , very good car. And then most of the depreciation will have already disappeared.”
#trade #ways #ensure #car