Investing is all about expecting a return, both in time and money. We invest our time in activities we find valuable or that we believe will benefit us in the long run. Similarly, we invest our money expecting to gain from it eventually. Despite the benefit of mobility, purchasing a car consumes a significant portion of our savings. Additionally, a car is one of the most rapidly depreciating investments, especially when looking at its residual value. A car stands as one of the poorest investments. Yet, for many, the convenience and independence a car offers outweigh its financial downsides.
Major Depreciation As Soon As You Drive Out of the Showroom
The moment you drive a new car out of the showroom, its value decreases substantially. This is known as ‘initial purchase depreciation’. The initial drop in value is often much steeper than the depreciation in the subsequent years of usage. The reason is simple: the car is no longer brand new. Buyers are often willing to pay a premium for a brand new car, untouched with zero miles on the odometer. However, once the car leaves the showroom, it can’t be sold as new anymore, even if it’s just a few miles driven. This psychological effect, coupled with the natural wear and tear from the moment of use, results in an immediate decrease in market value.
Residual Value: The Last Shine of Your Investment
When purely looking at the residual value, buying a car isn’t the best financial decision. Yet many of us choose to do so because of the myriad benefits a car offers, such as convenience, style, and sometimes even a necessity for work or daily tasks. Mobility and freedom are priceless to many of us.
On average, the residual value of a car after three years is between 40% and 70%. So, if you buy a car for €30,000 with a residual value of 70%, it would be worth about €21,000 after three years. Whereas, the same car with a residual value of 40% would have a value of €12,000 after three years.
If you’re considering buying a car with a lower residual value, it might be worthwhile to look at second-hand options. These could be less detrimental in the long run.
Worst Car Ever
Research by the British consumer organization WhatCar has shown that some cars lose a significant portion of their value in just three years. The Renault Zoe, originally priced at £31,995, loses a whopping 69.8% of its value, having a resale value of just £9,675 after three years. The Maserati Quattroporte, with a starting price of £142,745, depreciates even more dramatically. Within three years, its resale value dwindles to £45,225, representing a decline of 68.3%. In absolute terms, this means a decrease in value of nearly £100,000 in just three years.
While this rapid depreciation may sound discouraging for new car buyers, it can be an opportunity for second-hand car enthusiasts looking for a bargain. Therefore, it pays to conduct thorough research on expected depreciation values before purchasing.
While some cars depreciate quickly, there are other investments that might be even riskier. For instance, investing in the Iranian rial.
Most Value-Retentive Cars
Research by the Dutch consumer organization ANWB from 2023 shows the Toyota Yaris 1.5 VVTi hybrid 74 kW and Suzuki Ignis 1.2 66 kW are the frontrunners in retaining value, both with an impressive value retention of 73%. This steadfastness can be attributed to the rising fuel prices increasing the demand for hybrids like the Yaris, while Toyota’s reputation for reliability makes the model even more appealing. On the other hand, the Suzuki Ignis benefits from its unique position as a compact SUV and an attractive starting price, enhancing its second-hand value.
When is a Car Value-Retentive?
There are several aspects that determine the value retention of a car. The type of engine plays a significant role in retaining value. For instance, plug-in hybrid drives become more appealing with rising fuel prices. Additionally, we observe that increasing new car prices have an effect: as new cars become pricier, the demand for young used cars goes up, leading to a rise in their prices and, hence, value retention. The car type and brand reputation also influence value retention. Lastly, market trends, like the popularity of certain models or specific versions, play a role in maintaining value over the years.
Investing in Cars
Even when considering the most value-retentive cars, investing in a car remains an unprofitable venture. While some models may retain their value better than others, it’s important to understand that almost no car will genuinely appreciate in value over the years. Depreciation is a part of car ownership. So, even if you opt for a model with high residual value, you’ll still face significant financial losses in the long run. Owning a car should be viewed more as a necessity or luxury rather than an investment. The real value of a car lies more in convenience, freedom, and enjoyment.