KEY POINTS:
New cars depreciate the values of older cars
Older cars are held up by their even older variants at the lower end of the market
Cars depreciate more with age than they do with miles
Why would anyone buy a 3yr old car with 30k mi for only $5k less than a new one?
Cars lose value, right? Surely, a used one should be cheaper than a new one. But what if I were to tell you that there’s tremendous financial opportunity for you as a buyer, owner, or seller, if you can grasp why and how cars depreciate?
As a buyer, you can figure out what car to buy and when to enter.
As an owner, you can figure out how long to keep/when to sell.
As a seller, you can figure out how to best position your car for the sale.
TWO TYPES OF DEPRECIATION
There are two types of depreciation- condition and time. For the purposes of this article, let’s focus on the latter, as this is what most of us experience.
Cars depreciate more with time than with mileage.
Let me say that again.
Cars depreciate more with time than with mileage. (this is a hint on the kind of cars to look for)
Cars depreciate with time simply because there’s usually a newer variant available. New cars push the values of old cars down. Simple math. But let’s go further.
EXAMPLE – THE FORD EDGE OUT OF TIME
In 2021, I worked with a senior citizen client who was selling a 2010 Ford Edge with 14,000 original miles. The car was an absolute time capsule with cutting edge Ford technology from 2010!
The market value of the car was approximately $13k, which makes sense because a 2010 Ford Edge cannot be worth the same as a 2021 Ford Edge with the same miles. Not only does a new 2021 Ford Edge push the values down but so does a 2020, and a 2019, and a 2018, and a 2017… you get the picture.
So that old Ford Edge landed in the typical $10-15k price block (I’ll explain what I mean by “typical” more later). But what if that car had 100,000 MORE miles? So, what if it had 114k mi instead of 14k mi?
$8,000. Yup, only $5k less. At that age, 100,000 mi was worth $5k.
Absurd, isn’t it? But, logical? Absolutely.
THE OUTLIER TAKING US TO SCHOOL
Some cars land in price blocks that don’t conform to regular data. For example, if you have a 10yr old car with 100k mi. That’s a very normal with a very linear form of depreciation. The market is clear on how to price these cars.
But the outliers. What to do with an 11yr old car with 14k mi? Those cars get pushed down by new variants, but also get held up by older ones.
In the case of that Ford Edge, it couldn’t be worth $10k because you had cars with 100k mi more right under that. It couldn’t be worth $15k because you had much newer examples right above it.
Every car lands in their respective $5k price block, some more linearly than others.
So let me ask you, wouldn’t it have been worth it for someone shopping at the $5-10k price block to peek over at the $10-15k price block to see if there was anything better for a little more?
If I bought a 2010 Ford Edge with 80k mi for $10k and I saw that there was a 14k mi example for $13k, I think I would’ve cried.
IT’S LIKE A SANDWICH
So here’s the principle- car values get pushed down from the top and held up from the bottom. Let’s call this the “Sandwich.”
Consider what is above (newer, better condition) and what is below (older, lesser condition) to figure out what the expected depreciation is and how long it’ll take.
“ANOTHA ONE”
Let’s drive this point home further. Consider the “sandwich” for a Honda Civic:
2026 Civic LX – Original MSRP of $25,890 (between the $25-30k block)
2023 Civic LX w/ 30k mi - $21,000 (between the $20-25k block)
2020 Civic LX w/ 60k mi - $17,000 (between the $15-20k block)
2017 Civic LX w/ 90k mi - $14,000 (between the $10-15k block)
2014 Civic LX w/ 120k mi - $10,000 (between the $5-10k block)
Because of how common this car is, the data is strong. Just by observing the “sandwich,” you can spot the opportunities.
NOT ALL LOSSES ARE EQUAL
Let’s say the loss to between the 2023 Civic and 2020 Civic is the same as the loss between the 2017 Civic and the 2014 Civic. Although, on paper, it can look the same, the reality is that not all losses are the same.
Consider that a newer car can have newer safety technology, better technology, better fuel efficiency, less to maintain, and ultimately provide more reliable miles for the same loss.
WHICH PATH SHOULD I TAKE?
After reading this post, which one would you go for and why? I’m not saying there’s always a “right answer” (there are wrong answers, though), but I want to equip you with the logic to figure this out based on data.
