Last Updated on July 24, 2022 by The MediFi Guy
Cars depreciate. Which is to say that they lose value over time. Why? Due to ongoing damage in the form of wear and tear over time – which given enough time and use will eventually lead to the car being declared unroadworthy – and the release of newer cars with the latest technology that people are more willing to buy instead of the older cars.
Losing value off the lot
The thing about cars, as you’ve probably heard before, is that they begin to depreciate the moment you drive them out of the dealership. Thereafter they lose about 10-20% of their value every year, resulting in a loss of close to 50% of their value after 5 years. Why? Because the dealership buys the car from the manufacturer at a wholesale price, then adds a markup to the price in order to charge you, the customer, a retail price for the car. That markup can be tens of thousands of rands. If you were to change your mind the moment you drive out of the dealership and turn around to try to sell back the car, the highest price you could hope to sell it for is the wholesale price that the dealer paid for it initially.
The car immediately loses the value-added in the form of the markup to reach the retail price, which I re-iterate, can be thousands of rands. Hence the instant depreciation.
The car on average continues to lose 10-20% of its value per annum and can be worth half its original value by the time it’s 5 years old. That means that a brand new R300 000 car would immediately take a depreciation hit that could theoretically bring its value down as low as R280 000. Then after 5 years, it could be worth as little as R150 000. That’s a loss of R150 000 over 5 years.
Whereas, if you had instead bought a R50 000 second-hand car cash, it would be worth R25 000 after 5 years. That’s a loss of only R25 000 after 5 years.
The aforementioned scenario can shed some light on the often-repeated slogan: “If you’re going to buy a car, make sure you pay cash for a 5-year-old second-hand.”
The reason is that when you buy a 5-year-old second-hand car you avoid the worst of the car’s depreciation hit which takes place during the first 5 years of the car’s life.
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