The Depreciation Dilemma

By Jack R. Nerad

Don't let anybody kid you -- buying a new car is not a "good investment."  A good investment is something that should appreciate in value or in some other way make you money.  Well, one thing is sure, the new car you buy today is not going to gain in value over the course of time, so you are much better off looking at a new vehicle as an expense.  And good business sense suggests that you should do everything you can to minimize your auto expense.  But, of course, most people don't even come close to doing that.  They have been brainwashed to believe that a brand-new car is an important symbol of their status and success and, further, that they need to acquire one of these totems every two or three years or so.  That's great for car manufacturers, not so great for your personal financial well-being.

There is, however, one important step you can take in minimizing the loss you are going to take on a new-vehicle acquisition -- pick a vehicle that is predicted to have good re-sale value.  Of course, you can't tell exactly how good its re-sale value is until you try to re-sell it, but you can come close...if you do your homework.

Unfortunately for their own financial position, most people don't like to take the time to do this kind of homework.  Plus, they don't really know where to start.  Which is why we at Driving Today are here to serve you.  You see there is an industry organization that tracks and predicts re-sale value, and it has been doing so for decades.  Now it is beginning to make a version of this data available to the public.

Automotive Lease Guide (ALG) has begun to publish the "ALG Depreciation Ratings." The one- through five-star ALG ratings provide you with an accurate and convenient method to compare the amount of depreciation one vehicle versus another will experience over the lifetime of ownership. The ALG Depreciation Ratings are now available on Edmunds.

The ratings are distinguished from ALG's standard industry residual values in that they utilize the actual transaction price that consumers pay for a vehicle as opposed to the Manufacturer Suggested Retail Price (MSRP) as the starting point. In addition, the multi-star system is designed to be consumer-friendly and to provide a range of depreciation.

"The depreciation ratings are a natural extension of ALG's residual forecasting expertise. Retained value has become an important purchase decision in this era of incentives, and these ratings will be extremely useful for automotive purchasers," said John Blair, ALG's chief executive officer.

You can tell he doesn't talk to the general public much, but what he's getting at is true.  The new ratings can be extremely helpful because the recent trend of aggressive automotive incentives creates a large gap between the MSRP and the actual transaction price of a vehicle. This means that predicting re-sale value becomes very difficult for consumers, and comparisons between models even more difficult.  The ALG Depreciation Ratings will incorporate ALG econometrics (that's a good thing) and Edmunds's "True Market Value" as well as other market factors.

Using the new data still won't make your new-vehicle purchase a financial windfall, but it can help you avoid taking an unneeded bath by being hit with unexpected depreciation.  In fact unexpected depreciation, not unintended acceleration, is the major pitfall in buying a new car.

The author of The Complete Idiot's Guide to Buying or Leasing a Car, Jack R. Nerad serves as Driving Today's managing editor.

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