Every once in a while, you go on vacation and end up really liking the car you rent. It’s quiet, drives great, has plenty of room for all your stuff and you associate it with fun and relaxation. You decide to buy the same car when you get home. After all, you just had an extended test drive. What better way to make a smart buying choice?
There are a lot of other ways to make a smart buying choice. While a car rental can be a great opportunity for a long-term test drive of a new car, buying a car that’s popular in rental fleets can cost you down the line. That’s because cars with a high number of fleet sales have lower residual values than cars that aren’t typically sold to rental agencies.
Larry Dominique, president of ALG, a company that tracks car values, explains, “Most Americans don’t spend enough time paying attention to the number one depreciating item they have, and that’s their car.” He says that consumers need to pay attention to a car’s residual value, because if a car has a poor residual value, “that’s a much greater cost to you than fuel by far.”
A car’s residual value is its estimated worth after it’s been driven for a certain number of years. It’s used to set the terms of new car leases, and plays a large role in determining used car prices. Residual values don’t matter much if you buy a car and drive it until the wheels comes off, paying off your car loan in the process. The thing is, most people don’t do that. Most people drive their cars for a few years and then trade it in. A car with a poor residual value makes a bad trade in.
There are several factors that drive residual values. One is brand. “Brands that have consistent behavior in the marketplace and don’t heavily discount their vehicles,” tend to have better residual values, says Dominique. Another major factor in a car’s residual value is its presence in fleet sales. Fleet sales are sales of cars not to regular consumers, but to organizations like rental car companies, taxi fleets and governments.
“Fleet sales are really bad for used supply,” says Dominique. “If you put a lot of cars into rental fleets it messes up your used supply so you have a lot of two-year-old vehicles with 40,000 miles on them. It really screws up the consumer’s perception of what that car should be worth.” Because cars with high presence in rental fleets have so many more miles than used cars of the same age, they have lower used car prices. That in turn drags down the prices of the same model overall, even if a particular car wasn’t ever used as a rental.
So, before you buy that rental car you loved on vacation, know that it could cost you a lot more than insurance, maintenance and gas. If it’s a common rental car, it will have a poor residual value, and that depreciation will cost you when it’s time to trade it in.
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