Depreciation is elephant in the room
Canadian Black Book has a tool to help determine your car’s current worth
The Internet may have created a generation of informed car shoppers, but it has yet to unravel the sphinx-like mysteries of auto financing.
“It’s the last domain of buying a vehicle,” says Brian Murphy, VP research and analytics at Canadian Black Book (CBB). Almost everyone — 97 per cent of vehicle owners — feels more education on loan terms and equity should be available during the car-buying process, according to research conducted by Canada’s auto valuation authority.
Most Canadians don’t know that the single biggest new-car expense is depreciation — that silent menace that attacks the value of your vehicle like some kind of pecuniary rust. Depreciation comes into sharp focus when shoppers visit a dealer to buy a new model and discover just how little their present vehicle is worth. In 2018, 39 per cent of vehicle trade-ins in the Toronto market were in a negative equity position averaging $5,411.
“Car buyers are taking on extra debt by folding it into their next purchase of yet another depreciating asset,” Murphy explains. Stacking auto debt is especially troubling in the present climate of rising interest rates, he says.
New vehicles typically lose 20 per cent of their sticker price in the first year of ownership and another 15 per cent in each of the second and third years. Essentially half of their value crumbles away before the war- ranty expires. Still, some makes and models fare better than others.
CBB reveals its Best Retained Value Award winners ahead of the Canadian International AutoShow each year to help steer debt-wary car shoppers toward the brands and models whose values degrade the slowest in their segments.
CBB tracks the valuations of four-year-old used vehicles at Canadian wholesale auctions and compares those values to their original sticker prices. The 2019 winners are made up of 2015 model-year vehicles whose value declined the least in 23 distinct segments.
The frontrunners are nothing if not consistent. The overall brand winners in the broad car, truck/SUV and luxury categories are the same as last year: Toyota took both the car and truck categories, while Porsche won the luxury segment.
Trucks and crossover/SUVs retain their value much better (61 to 73 per cent after four years) than cars, reflecting the strong consumer demand for light trucks in Canada. As a segment, luxury cars performed the poorest, retaining just 37 per cent of their value after four years, with subcompact cars not much better at 44 per cent.
The Jeep Wrangler keeps its crown as the vehicle with the highest value retention in the market at 84.7 per cent, thanks to its truly unique features and legacy. After seven years, the Dodge Challenger was displaced by a new sports-car category winner, the Ford Mustang, which retains 64 per cent of its value.
In addition to identifying the cars and trucks that depreciate the least, CBB is introducing a free research tool this year that’s especially helpful.
“Our contribution to better understanding is the Equity Calculator, a new online tool that nobody has ever provided before,” says Murphy.
Consumers can enter their vehicle and finance information to create a chart that pinpoints when they will no longer be “under water” on their loan by owing more than the vehicle is worth.
We punched in some basic information for a top-of-the-line Dodge Grand Caravan that sold for $49,000 financed over 84 months. When does the owner end up on the positive side of the equity picture? At month 75 — more than six years into the seven-year auto loan.
“That sounds about right,” says Murphy. “The lower payments you get with a seven- or eight-year loan term are great, until circumstances change and you have to get out of your car and into something bigger because you’re starting a family.”
Murphy says being one or two years into your long-term auto loan and having to exit means taking a big financial hit. Imagine returning to the dealer with a two-year-old minivan you paid $49,000 for and receiving just $30,000 for it. Ouch.
The difference between a low-depreciation model and a high one can net the buyer $6,000 more at trade-in time. The CBB Best Retained Value Award winners go a long way in securing that extra cash.
“If you’re looking at three different models each worth about $45,000 and can’t decide between them, consider what each one will be worth in five years and pick accordingly,” counsels Murphy.
Canadianblackbook.com provides the assessment tools.
“Consumers do have control over which vehicle they choose to buy,” Murphy says, reminding us that knowledge is power.