MONEY COMMENT
Choose Your Car With Care

By Cliff D'Arcy
January 30, 2003

I have a shameful confession: despite passing my driving test first time, I'm a terrible driver. So bad, in fact, that I haven't driven for several years; I rely on public transport or my wife chauffeurs me around. There, I've said it and I feel better for it.

Even so, just like many others, I admire high-performance and well-designed cars, especially of the luxury and sports varieties. It's just unfortunate that I can't drive them well (or at all).

That's why I was interested in a report published by building-society-turned-bank Alliance & Leicester (LSE:AL.). A&L publishes an annual new car depreciation report, which reveals that the value of your car when you come to sell it - its "residual value" - is affected dramatically by depreciation (an allowance for aging and wear and tear).

A&L reveals that a typical new car loses over a fifth (22%) of its value in its first year and close to half (45%) over three years - a bit like the falling stock market from 2000 to 2002.

Depreciation can vary hugely, depending on the make and model you choose. In the Family Car category, the typical new car loses almost two-fifths (37%) of its value in its first year and almost three-fifths (57%) over three. This is largely due to the fact that the popularity of Family Cars means there is a plentiful supply, which pushes down used-car prices.

Let's look at this in practical terms: you buy a brand-new Renault Laguna for about £13,500 but, after three years, it's worth around £5,800. This means that you and your pride and joy have lost £7,700 in just 36 months - ouch! What's more, that's without accounting for the interest cost of buying on credit, etc.

Other car categories hold their values better, such as Compact Executive cars. A typical example is the Alfa Romeo 156 (down 18% and 41% respectively). City Cars hold their value best (down 38% over three years).

Personally, I've never bought a new car, as I dislike the idea of buying an asset that falls in value so much over time (although my shares seem to be following a similar pattern). I prefer to buy a one- to three-year-old used car and let the previous owner bear the early cost of depreciation.

Nevertheless, if you're going to be well informed when choosing a new car, check the depreciation rate of the model you're planning to buy. It may come as something of a shock.

Download the car depreciation report as a PDF file.

Become a smarter car buyer by reading the Fool's Car Buying Guide.