The depreciation of a new car is the same as the loss of value of the car as the car gets older. As seen in the graph above, you can see that the sharpest depreciation occurs during the first year. Every single new car will have depreciation as soon as you drive the car off the dealership lot. An average new car will lose one half of its original MSRP value in 3 years. The highest depreciation occurs after the first year and then the depreciation slows down each additional year.
Now let’s compare why depreciation matters in car leasing.
New car leasing offers lower monthly payments than buying with a traditional auto loan financing. The reason is because only the depreciated value is financed, not the entire value of the new car.
As mentioned above a new car’s value depreciates by 50% in its first 3 years. That means a 3 year or 36 month lease will have lease monthly payments of 50% of loan payments for that car.
Every new car’s depreciation value is different based on certain makes and models. Cars have different depreciation rates because of sales (great resale and popularity), consumer ratings and reviews, and reliability (recalls). For example, Honda car values depreciates slower than many new makes and models. The reason is because Hondas have high demand, excellent reliability, and have high resale values. This all leads to a slower depreciation than many other makes and models. This is why Hondas usually give the best bang for the buck when it comes to leasing new cars. Put it this way, the more issues a new car has such as reliability issues or history of recalls, the higher the depreciation will be and thus your new car lease monthly payments will not be as favorable compared to a Honda.
Notice the trend in leased cars that I have helped others get into. Sample size of one.