Let’s talk about the dreaded “D” word

Let’s talk about “residual values”. Yes, we’re talking about the dreaded “D” word – depreciation. Once we know the picture regarding a prospective car’s future value (it’s our money after all!) then it may become an important part of the car buying decision process.

Residual or future value is all about supply and demand, brand popularity and reputation and will very much vary from model to model.

For example, the VW Golf will always have strong residuals because it has been around a long time, usually goes through a five-year change cycle and is sold on the basis of sound German reliability, good aesthetics and safety. Not to mention solid performance. That is not the case right across the VW range, however, as the Passat is generally regarded as a fleet driver’s car and has not enjoyed the same popularity as the Golf. It is considered by many to be somewhat boring, although again reliable.

The biggest losers in value tend to be the expensive, big engine petrol cars, such as the BMW 7 series and VW Phaeton (which will be worth only 26% of their original value after three years of average mileage) and also those where the manufacturers are competing for massive volumes like Ford, Vauxhall, Peugeot and Renault.

These cars, although popular and affordable, can often have terrible residuals because there is:

• so much choice coupled with the manufacturer’s tendency to invest heavily in the rental car sector and
• they are constantly subject to shape change, face lift and heavy duty dealer/manufacturer discounts to shift units.

The best cars for residuals today are usually diesels, 5dr hatchbacks and, in some cases, automatics (because of their rarity). Also the “new kids on the block” can cause a blip in the statistics as supply is starved to whip up demand (as in the case of the Nissan 350z a few years ago).

Running costs, insurance, fuel prices and tax will all now have a dramatic effect on future values and it is best to investigate how residual value affects any potential purchase you make if your own change cycle is to be three years or less.

Remember, new cars are coming to market regularly and there is more choice than ever before. Broadly speaking, unlike 10 to 15 years ago, there is not really a bad car made anymore so it is even more important to choose a car that perfectly (or as near to perfect as possible) suits your needs.

There are too many cars on the used car market from people who bought in haste and who then suffered financially by not taking the time to do their homework and by letting themselves become controlled by a salesman, selling them what he wanted to sell them and not what was right for them!

Now, depreciation is only ever an issue when you come to sell your car but if you are going to keep the car for three years and then move on then it’s a big issue. If you’re buying a brand-new car then, of course, you know we’re going to be hit by depreciation, it’s a fact of life, but how badly hit is where the science comes in. You may hear people in the Motor Trade say that when you buy a brand-new car and drive away from the forecourt the first time you “leave the 17.5% VAT behind”.

Although it sounds pretty sensational, it’s just another way of drawing attention to the fact that cars do depreciate heavily, especially in the first year; VAT has really got nothing to do with it.