How to Reduce the Cost of Depreciation When Financing Your Car

The average customer replaces his car every three or four years. A new car loses part of its worth immediately after it is bought. However, this effect caused by the pass of time, can be reduced if the buyer takes some precautions when purchasing a car. There are many things to be taken into consideration if you want to lose as little money as possible. This article points out a few tips to avoid depreciation as much as possible.After three or four years, a car is worth 70% of its original price on average. If you paid it in cash without financing, you may have lost 30% of its worth but you may have compensated with amortization. However, if you required financing to buy it, the amount you paid on interests probably increased the amount of money you lost to depreciation. You may wonder thus, what can be done to ease this problem.Different Cars Depreciate differentlySome cars, being more demanded, depreciate more slowly than others. If you wish to reduce the incidence of depreciation, you should purchase a car that depreciates slowly. You can find this information at specialized magazines, on the internet or by doing your math yourself looking at the prices of used cars advertised on newspapers and on the internet.Timing is essential when Buying or SellingA used car with only a year of use can be sold for at least 20% less of its retail worth at dealerships. After 4 or 5 Years, the price can drop up to 50%. As you can see, buying a car at the right time can save you lots of money and selling it on time too. If you plan to sell a car you are buying today, you shouldn’t wait more than 3 or 4 years if it is new. If you want to buy a used car, as long as it’s in good conditions, a car with 4 or 5 years of use starts depreciating more slowly since it already lost half of its worth.Smart FinancingFinancing smartly implies paying lower interest rates. If you are going to pay for the capital to buy an asset that will loose its worth immediately after you buy it, you might as well pay as little as possible for that money. In order to do so, it is better to request a home equity loan or an interest only mortgage rather than a personal car loan. Or at least combine an interest only mortgage with a personal car loan.Home equity loans and interest only mortgages carry lower interest rates so you can take advantage of this by combining them to buy a car and pay little monthly payments. The interest only mortgage has little monthly payments since what you pay on a monthly basis, are only the interests on the capital. The capital is repaid in full at the end of the loan. So if you plan to buy a car and sell it after three years, here is what you have to do:a) Calculate how much it will depreciate. If the Car is worth $40.000 and you’ll be able to sell it at $23000 in three years, keep those numbers in mind.b) Request a mortgage only loan for the amount you’ll be able to get when you sell it and make sure the loan length is at least a year longer than the time you’ll keep the car. If you’ll keep it for three years request a loan that is due in four.c) Request a home equity loan for the remaining amount. In this example, you should request the loan for $17000By doing this, you’ll reduce significantly the monthly installments you’ll have to pay in order to buy a car. When you sell your car, you can use the money to repay the capital on the mortgage only loan and you’ll be debt free. You can use the same system to buy your next car.