Name: Why Cars Lose Their Value So Fast
Uploaded: 2024-03-03T05:46:43.000Z
Duration: 12 min 48 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

A car is one of the biggest purchases a person will make in

their lifetime. But unlike a house, a car starts losing value

Adverbs of manner

right away, literally as you drive it off the lot.

You could keep it spotless inside and out, give it regular

maintenance and protect it against every ding, dent and scratch and

Depreciation. The rate at which that happens is one of those

numbers everyone in the automotive world thinks about.

Consumers, automakers and the massive used car market, which

makes up somewhere around 40 million sales each year, more than

But in 2020, something strange started happening, turning the car

Used vehicles were actually increasing for about two years,

which we've never seen anything like that for the for the market.

A lot of those trends have abated since, but those odd times led to

lasting changes in the post-pandemic world.

There are fewer cars to go around, and prices for both new and used

In addition, a lot of car purchases are financed, which means

if the resale value of the car dips too low, a buyer could end up

paying more for the car than it is worth.

That is what it means to be underwater on a loan.

Similarly, automakers want their cars to hold as much value as

possible, in part because they know customers care about that.

Depreciation also affects how automakers charge for leases, which

are an effective way of drawing in new customers but are expensive to

The fastest sedans lose value faster than SUVs, and cars from

brands with strong reputations for quality and reliability depreciate

more slowly. But on average, cars lose about 10% of their value as

We we just like being in a brand new car and it's not brand new once

The 10% loss in value corresponds almost exactly with another

And that number, say some insiders, is the primary reason a

vehicle's value drops that much in the first day of ownership

incentives. Most new cars are sold with incentives at one point or

another. When first purchased by a consumer, an incentive is a

discount on a vehicle provided by a manufacturer or dealer to induce

The average incentive on a vehicle was about 10%.

That means on average, new vehicles were sold for about 90% of

their MSRP or manufacturer's suggested retail price.

And so that car you bought seems to drop by 10% in value the moment

What is actually happening is that the market is pricing in the

probability you received a 10% discount or incentive on that

It's kind of a messy part of how we do things, because we can't go back

and see what the average transaction price is.

But we know historically what MSRP is on a year, make model

combination. And so we can go see the value of that car against its

Chances are you are often selling or trading it back in at a

dealership. The dealer is going to offer you the wholesale price on

the vehicle. What the vehicle would fetch at a wholesale market

like a dealer auction, those prices are always lower than the

The dealer would sell it to another consumer for, as there are

additional costs and margin that need to be absorbed.

That lower wholesale value also makes up part of the depreciation.

Consumers see and feel higher priced cars have higher markups or

variance, so there is an even bigger gap between their retail

But there is a third reason why cars lose value so quickly.

An economist named George Akerlof won a Nobel Prize for coming up

Akerlof's famous paper is called The Market for lemons, and the idea

In any market, there are information asymmetries.

This means sellers know more about the product they are selling than

If you have a car and it's like three days old or three months old

If the car was a good car, you're probably doing it because the car

From that first day drop, a car's value slides further about another

In the second and third year, it drops again and again.

Estimates of how much can vary depending on who you talk to and

Again, a car will fetch less money on a wholesale market than it will

on a retail market, and maybe during a transaction between a

In normal times, a steady supply of new vehicles year after year is

enough to drive the value of any given car down.

Add to that the normal wear and tear that comes with ownership.

You may get dings in your door over time.

You know, maybe there's a crack in your windshield.

Maybe your kid spills juice in the back seat and the, you know, the

upholstery is messed up and all of that's just wear and tear on a car,