What do you mean, no full refund?
February 11, 2005 5:31 AM   Subscribe

Why do new cars supposedly depreciate in value (up to 20%) as soon as someone buys it and drives it off the lot? I just do understand why this happens and who determines the rate it happens.
posted by jasonspaceman to Travel & Transportation (13 answers total)
 
Because it can no longer be sold as a new car?
posted by fixedgear at 5:56 AM on February 11, 2005


According to this article, a lot of the depreciation can be ascribed to the difference between the wholesale price and the retail price.
Let's look at an example. The base price of a brand-new 2002 Ford Taurus is $19,035, according to Kelley Blue Book.

The wholesale price of a 2002 Ford Taurus with just 100 miles on it is $15,390, a drop of $3,645 from its transaction price.
Need an auto loan? Check rates in your area.

The wholesale price of a 2002 Ford Taurus with 13,000 miles, roughly a year's worth of driving, is $14,665, nearly 23 percent less than its original transaction price.
posted by bshort at 6:00 AM on February 11, 2005


Most people would rather have a new car, and know there was no other owner potentially mistreating it before them. They're willing to pay extra for that, and for the ego-rush of saying "brand new car." So, it's not always "why does the price drop," but more "why so much more for a new car?" And the answer is "because people will pay it."

I love it, personally. It means later this year when I go car shopping I can get one a year or two old that is practically new for a lot less money.
posted by Kellydamnit at 6:02 AM on February 11, 2005


bshort has it right.

When you buy a new car, you are not only paying for the car itself, you are also paying for the salaries of all the people who work at the car dealership, the dealership's rent, the money it spends on advertising and promotions, and its profit. You are also paying for the luxury of choice - e.g., being able to select the style, color, and accessories in one place rather than having to pore over classifieds.

None of that value stays with the car when you drive it off the lot. When you turn around to resell your car, you aren't going to charge the new buyer for any of these things - you're only going to charge them for how much the car is actually worth.

This isn't only true of cars, its true of everything that you buy. Anytime you can cut out the middleman and buy directly from the producer, you save money. Its cheaper to buy houses directly from the owner; its cheaper to buy produce directly from the farmer; etc. etc. But middlemen provide "value added" things, such as selection and convenience. Welcome to capitalism.
posted by googly at 6:39 AM on February 11, 2005


Had bshort been, he would have said "Dealer Profit".
posted by sagwalla at 6:39 AM on February 11, 2005


OTOH, if a dealer somehow ends up with a car with 100-200 miles on it, they aren't going to sell it for 20% off. They'll knock off $500, say it was only used on test drives, and try to convince you it's had all the little problems worked out already.
posted by smackfu at 6:46 AM on February 11, 2005


Most people would rather have a new car, and know there was no other owner potentially mistreating it before them. They're willing to pay extra for that, and for the ego-rush of saying "brand new car."

And for a manufacturer's warranty, which aren't always transferable to second owners, and for being able to choose the color and options on the car instead of having to pick from the ones that are available.

I just do[n't] understand why this happens

The market for cars with 1200 miles on them is not the same market as the one for new cars, and the market for slightly-used cars has supply and demand curves that work out to lower prices.

I think talking about wholesale prices and value-added that's being lost clouds the issue. You don't need to resort to that. People selling slightly used cars are willing to accept lower prices than dealers are for new cars, and people buying slightly used cars are unwilling to pay new-car prices for them. Simple as that.

and who determines the rate it happens

Individual buyers and sellers, multiplied a zillion times. There's no Board Of Depreciation that determines it; the sticker price is just the dealer's / seller's best guess at, say, 110% of what price they think they can actually get for it.
posted by ROU_Xenophobe at 6:46 AM on February 11, 2005


ROU is right--it's supply and demand, and nothing more. People, on average, are willing to pay a premium to be the first owner of a car. People, on average, demand a discount if they are not going to be the first owner of the car.

One main reason for this is that people are very concerned about buying a car with some sort of horrible but undetectable problem--a lemon. People likely feel better protected from lemons when they are the first owner--the car has not been mistreated by a prior user, and the buyer has some recourse against the dealership if it turns out that there is a problem. When looking at an almost-new but used car, most people likely believe that there a greater lemon risk--after all, why is this guy selling an almost-new car? People are willing to accept the increased risk only at a reduced price.

That, multiplied by a zillion transactions, sets the price.
posted by Mid at 7:00 AM on February 11, 2005


There was a Nobel Prize awarded for an explanation of this; See
this, or this (Wikipedia).
posted by Boobus Tuber at 8:57 AM on February 11, 2005


Mid - This is exactly what I was thinking. I'm wary of year-old cars that are for sale because there might be something wrong with them -- I know some cars just need constant repairs. Slight derail -- is there any way to detect a lemon?
posted by chickenmagazine at 9:23 AM on February 11, 2005


And you can minimize the drop by buying a Honda.
posted by FlamingBore at 9:27 AM on February 11, 2005


greater lemon risk--after all, why is this guy selling an almost-new car?

Alternatively, someone might be selling an almost-new car because they've hit hard economic times for one reason or another, or bought a car beyond their means. In which cases, they're probably anxious to unload the car ASAP and will accept a lower price for it. So the point remains!

is there any way to detect a lemon?

If you can tell it's a lemon then it's not, strictly speaking, a lemon; it's a car with some obvious defect(s). A strict lemon is a car that appears to be fine, but actually has some hard-to-see problems.

So, no.

It's possible to imagine information regimes where you could, though. If repair shops had to keep logs of repairs and VINs, and you could query a system to see how many repairs any given used car had had (as well as checking for scheduled maintenance), you'd be able to spot lemons pretty well.
posted by ROU_Xenophobe at 9:49 AM on February 11, 2005


Chicken -- there are services on the web that will allow you to run a VIN number (redundant, I know) to see if a car has been in a major wreck or had other serious problems. Carfax is one; there are others. This is not foolproof, but helps. It is not foolproof because not every accident or problem gets reported to a DMV.

That said, a lot of new-used-cars are actually cars coming off a 1-year lease, or dumped by people who just didn't like them or couldn't afford them. In other words: they're fine.

The key is to get a big price discount. You are trading for a lower price but a higher risk. You don't get one without the other. Make sure you don't take the risk without getting the price.
posted by Mid at 9:52 AM on February 11, 2005


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