Depreciation: Frighteningly Expensive and Not Considered
Few car owners think of the cost of depreciation when they buy a vehicle. When you truly look at it, sometimes it can be astounding.
Here’s an extreme example of a higher end luxury car where depreciation can be outrageous. Our example car is a 2006 BMW 645I, a very nice sporty luxury car with a base price of $99,000. This same car can be bought used, with only 45,000 kilometers on the odometer for $37,500. That’s a drop of $61,500 in only 4 years!
Put another way… the previous owner paid $1.36 for every kilometer that he or she drove or approximately $15,000 per year in depreciation.
That is an insane amount of money to burn away and yet few people consider it. I know that this is an extreme example but it is a very important financial consideration and one that I bring up as an auto service professional. We hear some folks whining about the cost of auto repairs and yet I have never had a client spend even close to $15,000 dollars in a year on vehicle repairs and if they did, they would not be spending that again in the next year or the year following.
Now lets consider buying this car used. It’s a real bargain at this price and I would imagine that 5 years later, if well taken care of, it will still be worth $10,000 minimum. This next owner will only lose $27,500 to depreciation. Per kilometer, assuming that only 45,000 kilometers are driven, that costs only $.61 per kilometer or $6900 per year in depreciation.
Now this car, as it ages will no doubt need some repairs, but I would be hard pressed to imagine even a $10,000 dollar expense on this type of car. But, if we were to add $10,000 to the $27,500 of depreciation we have $37,500 total cost and per kilometer $.83. That is still a substantially lower cost.
Perhaps the downside is that the used car owner doesn’t have the prestige and cachet that comes with driving that beautiful new BMW; but he or she still has a fabulous vehicle and one that will be very reliable. The second owner will also have a huge amount of extra cash available to spend on other things or to wisely invest and make more money.
This is an extreme example of depreciation but it applies across the board with any vehicle.
Also not considered in this equation are financing costs and that adds further to the expense of the vehicle. Naturally this is much higher with the high price of the new vehicle. So next time that you are faced with a large auto repair bill – consider that compared to depreciation it may not be all that high.