Thinking of cars as investments

Some people are under the impression that people buy used cars because they can’t afford brand new ones. This is sometimes the case but not always. Some people buy used cars not because they can’t afford brand new cars but because they know that buying used cars is a much better financial decision.

You don’t realize it until it’s time to sell your car but depreciation is the thing that you pay for the most when buying a brand new car. More than the maintenance, more than the repairs and more than the car’s yearly registration combined. Brand new cars are killed by depreciation right after they roll off the dealership and into your hands. Let’s consider one of the most popular car models in the Philippines as a case study, the Toyota Vios. A brand new 2016 vios E automatic costs about 800k+ here in the Philippines. A 2^nd hand 2015 vios E automatic costs around 450k. In a period of around a year, you’d be losing 350k if you buy a brand new vios. That’s almost half the value of the car in just 1 year.

A car’s value takes it sharpest drop right after it leaves the showroom. It can lose up to 30% of its value as soon as the keys are handed to you. As the car ages, depreciation slows down.

Let’s say you bought a used 2015 vios for 450k and decide to keep the car for another 5 years. A quick internet search would show that a 2009 vios still costs around 300k. So if you buy a 1 year old, vios, use the car for 5 years, you’d only be losing 150k, Now if you buy the car brand new for 800k and you sell it after 5 years, (a 2010 vios is also worth around 300k-315k) you’d lose half a million pesos! That’s assuming that you paid for it in cash. If you paid for it on an installment basis, the interest that you’d pay the bank for a 5 year plan can amount to almost 200k. So that’s up to 700k down the drain in just 5 years.

My first car, a 1977 w123. After 1.5 years of ownership, I sold it at a higher price than i bought it for

Moving further down the depreciation graph, after 10 years, the car would be worth 230k. So in the first year of ownership, assuming that you paid for it in cash, you’d lose 350k on a vios. The next 5 years, you’d lose an additional 150, If you decide to keep the car for another 5 years, you’d only lose around 70k. The depreciation curve flattens as the car gets older, meaning older cars do not depreciate as quickly.

When it reaches around the 150-200k mark, depreciation usually becomes very incremental , You can buy a car worth 150k, use it for two years and sell it again at the same price or even higher if you got the car at a good deal.

Eventually a car will become fully depreciated. As long as it’s in good condition, the value will not go down anymore and may even go up. This takes a long time though. Case in point is the E30 BMW (1982-1993) which is now starting to overtake its successor, the E36 (1993-1999) in value. Back in the early 2000s, you could buy a 1970s Datsun 240z for around 150k, now you can’t find one for less than 400k even if it requires a bit of work. Almost all cars over 50 years old cost a fortune, fully restored or not

From an initial price of 800k. a loss of 350k on the 1st year, +145k after 6 years, +75k in 9 years

Different types of vehicles depreciate at different rates. Diesel SUVs hold their value pretty well. Compact sedans like the Vios do ok. Vehicles that depreciate the fastest are medium to large sized sedans. Which probably means that More car buyers prioritize fuel efficiency over luxury and comfort. Also, Filipinos being smaller people on average probably don’t put a lot of premium on leg room and head room.In almost all cases, gas guzzlers depreciate badly except in the case of high performance models. Up to now the 2^nd gen eclipse Eclipse (1996) still sells for around 300k, A 6^th gen Honda Civic SIR also still sells for 300k, These prices have barely changed in the last few years.

The brand also plays a significant role in the rate of depreciation. You can never go wrong with Honda or Toyota. For some reason, Nissans don’t hold their value well, save for a few models.

While Depreciation should be a major factor to consider when buying brand new cars. if you’re buying a used car, depreciation can work to your advantage. You can get pretty expensive cars at a small fraction of their original cost. Even fast depreciating cars will not depreciate as quickly as they did in their first 5 years.

Age is not the only factor that affects a car’s value. You can find cars that are being sold 30-50k even 100k below their average market value. Maybe the owner is in a rush to sell or maybe it has some minor issues that the owner doesn’t want to address anymore. If you have these fixed, you can instantly raise the value of the car.

If your main reason for wanting to buy a Brand new car is you want a reliable means of transportation, I would suggest that you buy a used car that’s only about 3 years old. That way, you have a car that’s reliable, may still have warranty and has already lost a significant amount of its value. The first owner has already paid much of the car’s depreciation for you. If you can’t afford to pay for it in cash, get a loan.

If you could buy either car at the same price, which would you rather have?

If you have some experience working with cars and you know basic troubleshooting, I would suggest that you get an older but more prestigious car. You’ll be a much happier man (or woman) in the long run. You’ll turn more heads driving a 15 year old bmw than a brand new compact car even if they cost just about the same. More than that, the 15 year old car won’t depreciate as much as the brand new one. A BMW may cost more to maintain but unless you buy a lemon, you’ll still lose more money from the depreciation of a brand new vehicle than the maintenance of a used vehicle, even if it is a BMW. Of course do your research first so you’d know what to expect from the car that you’re buying.

There are cases where buying a brand new car is a good investment. Rare supercars can go up in value in a short period of time. The Ferrari enzo is a limited producton car. Only 400 were ever produced between 2002-2003. If you bought one back in 2015, you would’ve paid 1.8 million dollars for it. After just a year, prices have almost doubled at 3million dollars (150 million pesos) When it was brand new back in 2002-2003, it was only worth around 600k dollars. So it’s a 500% increase in value in just 12 years, and an almost 40% increase in the last year. The next time you see that millionaire driving his rare Ferrari, don’t judge because he probably knows what he’s doing.

For a lot of people, their cars are a significant percentage of their net worth and as much as possible you’d want your net worth to go up and not down. You’ve probably heard people say that cars are the worst investments. They can be but they don’t have to be. Buy used, If it’s a newer model, don’t keep it for too long, sell before the next model is introduced, always be aware of the current value of your car. If you make yourself aware of how depreciation works, you can enjoy the perks of car ownership without having to bleed money