What You Need to Know About Passenger Cars and Resale Values

Depreciation is the biggest driving expense most car owners encounter. So when selecting a car, it's important to choose one with the least depreciation — or, put another way, one that retains the highest residual value.

This is true whether you finance the car, lease it or buy it with cash. If you're buying or financing a car, the residual value represents how much of the car's value you'll get back when you sell it.

If you lease a car, the residual value directly impacts how big your monthly payments will be — the higher the residual value, the lower the monthly payments. That's because monthly lease payments are directly calculated on the difference between the purchase price (called capitalized cost in a lease) and the residual value. That difference, plus fees and interest, is the amount you pay for a lease.

Residual value, for our purposes, means the value the car will retain when you're done with it. It differs from resale value in that "residual" values reflect the anticipated price the car will bring on the wholesale market — at trade-in, or when a dealer goes to auction the car after it's traded in. (Dealers don't generally make money selling cars at these auctions.) Automotive Lease Guide, the primary guide used by dealerships and finance companies to calculate leases, bases its prices on auction transactions.

With an expected residual value of 65 percent after three years, Mercedes-Benz's CLK-Class has the highest return on investment among passenger cars.

"Resale" value reflects the retail price the car may bring in a dealer or private sale. Thus, it will normally be higher. But in general, the better a particular car does at retail, the better it will do at wholesale. So in contrasting different models, "resale" and "residual" values are largely interchangeable.

As a rule of thumb, most cars lose about 50 percent of their value over the first three years of their life, so that's what we look at here. The best vehicles retain more than 60 percent of their value over three years, while the worst keep barely 25 percent.

So if you're looking for a passenger car with the greatest residual value, what should you look for?

Obviously, desirability is the greatest factor affecting residual values. This trend is borne out in the rankings of manufacturers, body styles, engine choices and options. Here are some other factors to consider.

• As in other segments, the reputation of the automaker has the greatest effect on residual value. BMW, Mercedes-Benz, Mini and Toyota passenger cars top the list. Traditional and small cars from domestic automakers, along with Korean brands, bring up the rear.
  
  
• Full-size cars and those with the highest sticker prices don't necessarily do better. Entry-level luxury cars dominate the top of the list, while the most luxurious sedans land midpack or worse.
  
  

Leather interiors, like the one available in Mazda's Mazda6, tend to boost residual value.

• Outside the top-performing entry-luxury coupes and sedans, modern car-based "crossover" vehicles fare better than other body styles. In descending order, crossovers are followed by convertibles, luxury cars, sport utility vehicles, ordinary sedans, coupes and wagons, and then pickup trucks and minivans, says Eric Lyman, managing editor of ALG.
  
  
• Today's modern, nimble sport wagons tend to hold their value better than their sedan counterparts.
  
  
• Even used-car buyers these days like extras. Luxury vehicles do better than their nonluxury counterparts. And even on nonluxury vehicles, options such as sunroofs and leather interiors hold up residual percentages, adding a combined $800 - $1,000 to residuals, says Lyman. The percentage remaining depends on how much these options cost when the car was new.
  
  Simpler options such as power windows and locks and air conditioning are critical for residual value. Cars without them suffer big discounts on the used-car market.
  
  The only options that fare poorly as a class are electronics, such as navigation systems. Think about it — technology improves so quickly that by the time your car is three years old, nobody is going to pay much for its outdated original systems.
  
  
• In luxury cars, it pays to choose the biggest engine available, especially if it's a V-8 instead of a V-6. But in lower-priced commuter cars such as the Toyota Camry and Honda Accord, premium engines won't pay back their initial cost.
  
  But here the story isn't all about desirability and demand. It's also a matter of supply. The most glaring trend in passenger car residuals is how well scarce diesel-powered models fare, consistently returning 3 percent more value after three years of ownership than their gasoline-engine-equipped counterparts.
  
  
• All-wheel drive does well regionally in northern and mountain regions; rear-wheel drive fares best in the Sun Belt.

These are important issues to consider, especially when you're shopping for a passenger car that offers affordable transportation. As one of a family's biggest expenditures, you can't stand to lose any more money to depreciation than absolutely necessary.