No Appreciation for Depreciation

You hear it said all the time: "I would never buy a new car, because the value depreciates by a huge amount the moment you drive it off the lot."

This bromide has been repeated so often that it has become an honored bedrock constituent of conventional wisdom. Most folks who hear this sentiment will nod their heads in agreement at the worthy who spoke these words, and will swear to the heavens that they too would never buy a new car, lest they also see their car's precious valuation drop like a bird struck dead.

There's just one problem with all this: it's stupid.

I don't deny that a new car's value immediately decreases as soon as you've bought it. That's undoubtedly true. It's just that it doesn't really make much difference if your vehicle's value immediately drops by several hundred, or even thousands, of dollars as soon as you drive it. Why would it? Presumably, most people who buy a new car expect to keep that car for an extended amount of time, probably for many years. In that scenario, why would you care if the car you bought for $22,000 is now only worth $19,000? You're not planning on selling it anyway. Why do you need to make sure that you hold onto that extra three grand in value? Are you a junkie gambler and need to use your brand new car as collateral on some desperate bet? Will your bookie only accept a car valued at $20,000 on your parlay? If that's your situation, you've got bigger problems than your car's depreciation.

Value drops off sharply at first, but after some time the rate of depreciation is going to slow down (assuming you take care of the car reasonably well). The car you buy new will lose value quicker than the same car from two model years before purchased new or used. But in eight years, when the new car is eight years old and the earlier model is ten years old, which will have more value? As likely as not, it'll be the one you bought new, though probably not by much; both cars' values will approach each other as they get older and older.

Some will object that the valuation matters for insurance purposes; that is, for premium purposes and for what you'll get on a claim if the car is totaled a week after you drove it off the lot. Premiums will always be higher for a newer--that is, higher value--vehicle. But at least one insurer--Liberty Mutual--specifically advertises a policy of "one year newer" replacement for stolen or wrecked cars. Other insurers probably have similar policies, and if they don't...well, more business for LM. Bottom line: insurance is hardly a reason not to buy a new car, if you can afford it (both the car and the premiums).

The "depreciation problem" thing is one of those examples of something that stupid people hear and they agree with it because they think it sounds like wisdom--except, of course, they're stupid, so what do they know about wisdom? This matter, like many other examples of conventional wisdom, falls apart when you think it through.

Now, if you want to lease a new car...well, you're on your own there.