Why does driving a new car off the lot cause such drastic deprecation?

Factual Questions
1

Common wisdom in the US seems to be that as soon as you title a new car and drive it off the lot, it loses a massive amount of value in those few minutes.

Why Does a New Car Lose Value After It's Driven off the Lot? - CarsDirect (but this doesn’t seem to actually answer the question!)

I seem to remember, years ago, reading about how a (local?) person had won a “new” car from a dealership as a result of a promotion or something, but the car was actually several model years old and had been New Old Stock that was never sold in the year it was intended to and just kind of languished on the dealer’s lot. The article in the paper said that the person who won it was intending to sell it, but that the very fact that the dealership would be transferring title to the winner first would cause deprecation, and at least implied, if not explicitly asserted, that if the dealer would have been willing to directly transfer the car to the person that the winner wanted to sell too, it would have been worth more to the winner since it would have been sold before ever having been titled. That smacks of superstitious thinking - I would think that the car would have incurred much more wear and tear on former test drives and just being exposed to the elements for so many years and that exposure would dwarf the wear and tear on the vehicle incurred when the winner drove the car off the lot and drove it straight home or to the home of the person they wanted to sell it to.

Why, exactly, does this happen? Is it primarily psychological, in that many people have such an emotional reaction to a “new” car that has been titled for all of 5 minutes to John Smith across town that they couldn’t realistically see themselves paying even 95% of sticker price for it to him, or is there regulatory or insurance pressure going on here that forces the value down?

2

Part of it is psychological, no doubt, but another thing is that used cars are riskier. A new car comes with many protections: manufacturer warranty, lemon laws, and (ideally) a dealer that will try to keep you happy if any problem does come up.

An otherwise new car sold as used will lose some of those protections. Lemon laws usually don’t apply to used vehicles purchased from a private seller. The manufacturer’s warranty may transfer to the new owner, but under less favorable terms. In the case you give, a hypothetical five-year warranty might protect the original owner from the date of sale, but the second owner might only have warranty coverage until five years from the original manufacturing date. And since the car has been sitting on a lot for several years, that means the warranty might expire in a year or two. So if a problem comes up, the new owner is more likely to be SOL.

Of course, most cases aren’t quite like your example. If someone is selling a one or two year old car, there’s a nontrivial chance that they’ve abused it or found some major problem that they don’t want to deal with. There are more benign reasons for selling a car, but my WAG is that one-year-old used cars are mostly sold under extenuating circumstances.

3

A non-cited answer in GQ, so take it for the value of the paper it’s written on.

I don’t think the huge depreciation drop has been true in quite some time. Of course if somebody negotiates badly and pays over true market value for a car, then its resale price might better represent the lower true market value. When I bought my car new, back in 2002, several months after I bought it the Blue Book retail price was actually more than what I’d paid new. Of course the wholesale price was lower, and that’s what the Carsdirect article mentions. If a dealership buys a brand new car for $18,000, and you buy it from them for $20,000, there’s no way they (or any other dealership) will buy it back from you for $20,000, they can buy another one from the manufacturer for $18,000.

A quick look at the local craigslist shows many 2011 used cars for sale. None of the ones I looked at were “just driven off the lot.” Most were in the 20-30,000 mile range, and the price reflected that. One by owner sale only had 7900 miles, and was asking about $15,000 on a $20,000 (new) car. That seems like it might be a good deal, but I don’t know what that car, a Suzuki SX4, typically sells for new, only what the Suzuki web page lists it at.

When I bought my car new I had to put up with the typical, “you should have bought an almost new used one and saved!” Of course I’d looked into it. They didn’t exist.

Motorcycles are a bit different of a story, the occasional Suzuhama GoFast 1000, almost new, 600 miles, down once, for sale cheap. Lots more 2-3 year old, 2-3000 mile bikes at a significant discount over new (“bought a toy, never used it, want a new toy…”)

4

That’s another good point. Used cars have become more expensive recently, relatively speaking. Because of the economy, more people are trying to save money by buying a used car, so demand is up. Also, the “cash for clunkers” program effectively destroyed lots of perfectly functional cars, so supply is down.

I did the math when I bought a new car last year. For the car I was looking at, there wasn’t a huge depreciation between a new car purchased with all of the available incentives, and a one or two year old used car of the same model. And compared to a crude dollars-per-mile over the life of the car, I estimated that I was only paying a few hundred extra dollars to get a new car. That was easily worth it for me – I get the “ooh shiny!”, more years covered under warranty, and the peace of mind knowing that nobody else has abused the car in the past.

FWIW, echoreply’s Suzuki SX4 example (MSRP ~20k, used asking price ~15k) has a new car price actually around 17-18k according to Edmunds (see their "true market value figure here).

5

99.99% of the time, the used car has not been titled for 5 minutes, it’s been used and driven significantly by the owner. If it HAS been titled for a very short period, I’d have to wonder what went so wrong in that period that the person is trying to dump it now.

With your prize winning example, it’s a mess, I wouldn’t know how to value an unused “new old stock” car in comparison to a well maintained lightly used car of the same year. I would also question the assumption that it would be worth significantly more as a direct transfer unless they had a customer in mind who said they’d pay much more for that transfer. Newspaper journalists are known for jumping to conclusions like this because it makes for a memorable story.

6

I seem to recall that this situation appeared in a local newspaper possibly in the mid to late 1990’s. For some reason 1994 pops into mind but then there was another memorable thing that year in my life so I may be misremembering. If I recall from the article, the car was a model year 1990 car, and may have been a sports car or sporty car (possibly a Mustang?) that the recipient may not have been entirely keen on.

7

I have also seen new car dealerships selling very low mileage used cars and pricing them at or above the price of a brand new one.
I think they do this knowing full well nobody will pay “brand new” price for a vehicle with 3,000 miles on it but they still want to present it as-good-as-new and make the buyer believe they are getting a steal when it’s eventually offered for hundreds cheaper than the brand new one.

8

Not that I regularly buy cars, but the basic rationale that a used, even if for a short time* item, gets a much lower price when selling than a brand-new item, does make sense for me. Warranties have already been mentioned, and are a big factor. If brand new item X sells for 10 000 dollars, and one that has been used 1 month sells for 9 000, then it’s easier for me to make up the difference and buy a brand new one with warranties than a month-old without. So the seller of the month-old item has to lower their price to about 2 000 before I think the difference makes up for the loss of warranty.

Besides cars, I see this with computers, and their high rate of advancement, but also with electrical appliances - every time you spend a lot of money and need a warranty for the next 5 or 10 years that it will actually work. (With a toaster for 15 dollars, it doesn’t matter so much).

*I haven’t heard literal 5 min., but generally the divide between used cars and new for warranties, but also tax laws, is sharp.

The practical example usually given here are “Year-cars”: employees of the car-makers like Mercedes or BMW can get a discount to buy the company’s cars and are allowed to re-sell one year later. They usually take very good care to keep them in pristine condition and re-sell at a good price, but still below the price for a new car so it’s a good deal for the buyer, too.

Car dealers who register the car for importation or other issues and then sell the car to the buyer as new are regularly a matter for the courts; some also try this the other way, intentionally registering it so they are allowed to sell it as used, where different laws/ taxes apply.

9

Another issue is financing. Barely-used cars don’t qualify for all the highly subsidized financing new cars do, but are still high-dollar purchases. If you have to do a longer loan term, the difference in finance charges alone might make up for the difference between new and barely used. So those barely-used cars cost less because they’re harder to get people into, although they’re bargains for people paying cash.

10

Look at it this way:
There are 2 cars sitting in front of you.
One is a new car.
Maybe a hundred miles on it.
Full warrenty.
The dealer is offering 0.9% financing.
I’ve been driving past the same dealer for the last 20 years. I have full faith that they will be there next year, and I can contact them if something goes wrong.
Trade-in - happens all the time at a dealer

The other is a previously owned car, same model year, same options.
Why is the owner trying to sell this so soon? Have there been problems?
The warrenty clock has started. 5% or more of the warrenty time may be up.
A loan to pay for it will probably be at 7% or higher
Who is the seller? Do I have any recourse if I find out there are issues?
What are the chances that the previous owner wants to buy my old car?

So, how much of a cost difference does it take, to make the second car look attractive? The loan rate part alone could easily be worth a couple thousand dollars.

11

Yeah. If someone bought a new car two weeks ago, and is trying to sell it to me now, my calculation of an offer is going to include a substantial probability that the seller knows something important about the car that I don’t - and it’s probably not good

12

I have actually seen almost the same circumstance in real life. Many, many years ago, in a small Colorado town near South Park, a High School classmate of mine won a modelling contest sponsored by one of those magazines aimed at trendy young women. The biggest part of her prize package was a brand-new blood red Pontiac Fiero.

For those who aren’t familiar with it, the Fiero was a mid-engine, rear wheel drive, two seater, sunroofed, molded plastic little freak of a car. Sexy as hell, and totally inappropriate for driving at all for maybe half of the year where we lived.

I guess there was a bit of parental input when it was time to pick up her car, as it seems she immediately sold it to back to the dealership where she picked it up, and rode out in a used Jeep-- several thousand dollars richer.

Besides 17 year-old girls, the Fiero really appealed to one other segment of the population: Guys who were really deep in their mid-life crisis, but didn’t have the cash to go pick up a 911. Enter my dad, who was actually looking for a cheap hatchback when he started shopping. I suspect the folks at the dealership were probably able to see him coming from Low Earth Orbit.

With only 20-something miles on it, the car was sold “used” for cash at a HUGE discount. Our guess was that the dealer was the true winner, since it was paid for before they even had it on their lot.

13

I just checked Cars.com for the prices new and lightly used for three popular compact cars, within 500 miles of my Zip code - the Honda Civic, Chevrolet Cruze, and Ford Focus. And as far as I can tell, you might be able to save at most a $1,000, depending on the model and trim level. So for that segment, there isn’t the deprecation hit any more, at least at list price.

14

It’s a simple fact that the dealers pay no more for a used car than they must. As far as a buyer goes, why buy a used car, albeit a few hours used, if it was close to the price of a new car?

A dealer confided in me that trade-ins were a necessary evil. They only did that if it was required to sell a new car, and then, they only offered what they could get at an auction. They much prefered to buy their used car stock at auction, where they could pay less for a car.

Keep in mind that not all cars depreciate the same. Cars that are in limited supply and high demand carry premiums, even used, while the opposite is true for those that don’t.

15

I have had similar results when comparing new and used cars, the ‘conventional wisdom’ does not seem to hold up with any of the cars I check on.

Part of the reason so much depreciation is claimed is people will often use the MSRP of new cars when calculating depreciation, most new cars are sold for less than MSRP and sometimes significantly less.

Another reason is they are usually comparing the retail price of a new car and the wholesale (trade in) price of the used car. If you do what RandomLetters did and compare the actual selling price of new and used cars of the same model/options I bet you will not find that drastic a difference. I like edmunds.com. (Edited to add - Edmunds will let you check the actual selling prices of new and used cars)

Also - Don’t most new car warranties transfer to the new owner?

16

They do, but often the transferred warranty isn’t quite as good. For a few examples I came across in my recent shopping:

The original warranty might cover X years from purchase, whereas the transferred warranty covers X years from the date of manufacture. An average car probably sat around for several months in transit and on the dealer lot, which is now “lost” from the transferred warranty. The original warranty might be “bumper-to-bumper”, but the transferred warranty only covers powertrain. Or in might cover x-y years.

In the cases I was looking at, a three or four year old car might have several years of coverage remaining for the original owner, but for me the warranty would only last a few months if at all.

17

The car is not new. It is used. Matter of fact it is used once the deal is signed.

18

Well, no kidding. The core of the question is: why does the value of the car decrease so greatly in that magic moment between becoming “new” and “used”?

19

Just a quickie using edmunds.com’s True Market Value –

2011 Mazda3 grand touring $23,607
Same car and options used $23,151

Both prices are dealer retail, I would take the new one every time for that price difference. Of course if you use the trade in price ($19,950) now it does look like a huge loss.

20

There’s always going to be a spread between the buying and selling price. That’s what drives the profit motive. Think of stocks & bonds – the bid and ask price on the same item is never the same.