Residual value, or resale value, is one of the most important factors to consider when
buying a car—nearly all of them depreciate, but some much less than others.
W
hen you buy a new
car, it's fairly easy
to research the
costs involved, such
as MSRP, local taxes, and delivery
charges. We know, however, that
the moment a car leaves the dealer's lot, it starts to lose value. But
how is that math figured, anyway?
The amount you'll get when
you trade in your car, the amount
you'll have to put down on your
next purchase/lease, and even the
interest rate you can get on your
next car loan are all impacted by the
term you'll hear a lot: "residual value," which is synonymous with resale value. If you don't know the ins
and outs of residual value, you're
hurting yourself when it comes to
buying a new or used car. All cars
(except vintage collectibles) lose
money over time (think of a used
car as you would any used appliance—its worthwhile life expectancy is reduced with age). But buying
cars that hold their value better
than others isn't hard to figure out,
and it's a good way to hedge against
the costs of owning a vehicle.
The Basics
There's
no
consensus on the value of a car after
a year or five years from its first
sale. There are just too many variables at play, including the market
for the car, whether the economy is
up or down, and the price of gas.
Plus, if there are 40,000 used 2009
Accords on the market, each one
will have been driven and cared for
differently.
But there are variables that
can be benchmarked, such as an automaker's and a model's past performance in keeping value, that organizations like Black Book use to
estimate what a new car will be
worth a few years down the line.
Black Book is a lot like the Blue
Book you hear about regarding the
value of a car, but Black Book is the
go-to that most car dealers use to
price a new or used car. It also helps
them know what interest rates
you'll be charged on a loan.
We talked to Black Book's
Ricky Beggs, in charge of the publication's research department, to get
an idea of how they figure out what
a 2013 model will be worth in
2018.
How Carmakers Keep Values High
hard-and-fast
Supply and demand plays a
big role in the value of a particular
model in a particular year. Too
much "car," just like too much of
any single commodity, will depress
the value of a car over its life cycle.
Put another way, you might
think Mercedes wants to sell as
many C-Classes as it possibly can.
And if demand were always bullish,
that would be true. But Mercedes,
just like Honda and every other carmaker, has a vested interest in
keeping residual values high because that enables Mercedes to
have a "cheap" money supply: How
much interest they're charged
through their captive finance arm (a
bank whose sole job is to finance
car loans for a single carmaker) directly influences whether they can
offer you that nifty 0.9 percent financing deal. High residual values
also mean that the certified-preowned (CPO) program Benz dealers
run can continue to be highly lucrative. A flood of C-Classes two years
from now would depress that CPO
market. Carmakers try carefully to
match production to demand because otherwise they have to crank
up incentives (cash-back offers) to
generate sales, and that's just the
type of thing that led to GM and
Chrysler falling into crisis. Eventually the cheap money spigot shuts off
and the debt must be repaid.
So carmakers are smarter
than ever at predicting sales volumes and will restrict production if
they see storm clouds ahead. Today
the cost of used cars is at or near an
all-time high because carmakers cut
supply during the recession, and