Buy Low, Resell High

What’s the most expensive part of owning a car?

Fuel, the commuter might say. Insurance, says the young man. Maintenance, says his father. But the real answer is depreciation. It takes a new car an average of five years to lose two thirds (66%) of its value. That means a car worth $30,000 when you bought it will only get you around $10,000 when you go to trade it in just five years later – a loss of $20,000, or around half the average yearly income of someone living in the US. A car that retains a mere 5% more of its value will net you $3,000 more on trade-in. Clearly, small differences in a car’s residual value can end up making a big difference when it comes to your wallet.

But what aspects of a car determine whether it will have high residual value? A quick glance at some recent cars with the highest resale values return names such as the Honda Fit, Honda Civic, Hyundai Accent, Toyota Prius, and Mazda3. There are a number of factors involved, but from that list it becomes clear that the two most important are durability and fuel efficiency.

Durability is the more obvious of the two. The primary downside to buying a used car is that it will break down and require repairs sooner than a new car. A car built to last will, obviously, last longer. These vehicles promise less risk for potential buyers and thus command higher residual value.

Fuel efficiency is less obvious, but begins to make sense upon further investigation. The more gas prices go up, the more valuable fuel efficiency becomes. The two main reasons to be concerned with fuel efficiency are environmental concerns and plain thriftiness. Both groups would be more likely to buy a used car as it is a method of recycling and saving money at the same time.

Conversely, the cars with the worst resale values tend to be larger vehicles like SUVs and vans, as well as luxury sedans. These vehicles are not only less practical, but also a poorer investment. Prospective buyers should weigh their options very carefully before deciding to purchase one as the penalty for buyer’s remorse is that much higher. Surprisingly, trucks can have high residual value, as their relatively low fuel efficiency can be offset by their cargo-carrying capacity.

While not as exciting as other considerations in buying a new car, it pays to pay attention to residual value.

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