Why You Should Care About Resale Value
We've heard it said that resale value is like the weather -- everybody talks about it, but nobody does anything about it. But that notion is wrong on both counts. First, not everybody talks about resale value. In fact, many consumers who should be paying attention to resale value simply don't, and that can be a costly mistake. On the other hand, suggesting that nobody does anything about resale value is false, too. While consumers tend to either ignore it or just pay lip service to it, most auto manufacturers pay a great deal of attention to resale value, because there are good business reasons to do so. Some carmakers actually go to the extreme of buying used vehicles wholesale at auction to keep prices up.
For manufacturers, the most obvious reason to pay attention to resale value can be summed up in one word: leasing. If a carmaker plans to be a player in the leasing market, which is currently running at around 20 percent of overall new-vehicle sales, then resale value becomes crucial to success or failure. Why? If the resale value of a model in an individual segment lags behind those of the segment overall, that model's lease rates will be uncompetitive. In leasing a car, the lessee is, in essence, charged for the difference between the vehicle's purchase price and the "residual value" stated in the lease contract, plus, of course, interest charges on the entire transaction. The "residual value" is actually the projected resale value of that vehicle, so models with high resale value will narrow the gap between purchase price and residual versus those that don't. The net result -- a lower monthly lease payment.
Even if you are not leasing, you, as a consumer, should care about resale value because in the typical ownership period depreciation will most likely be your biggest transportation-related expense. And, of course, depreciation is the flip-side of resale value. The numbers are quite eye-popping. Despite the fact that we continue to hear moans about high gasoline prices, the depreciation cost on a typical family sedan over a five-year ownership period can be nearly twice the projected cost of fuel, and it dwarfs all other costs associated with vehicle ownership as well.
The other important thing the consumer needs to remember about depreciation is that it is insidious. There is no sentence on the Monroney sticker calling it out, no line on the sales contract that specifies it and no payment book for it, but it costs... and costs and costs and costs. You won't write one check for depreciation, but when you find it is time to sell your vehicle and purchase another, it can hit you like a shovel to the back of the head.
So, like size, resale value does matter. You can save yourself thousands of dollars by seeking out comparative information on resale value before you buy your next vehicle. Unlike the rain this morning, it is something you can do something about.
An expert on automotive finance issues, Driving Today Contributing Editor Luigi Fraschini lives in Cleveland.