What You Need to Know About SUVs and Resale Values

If you're like most people, the price of a new sport utility vehicle is more than you have in the bank. And if the old beater has bit the dust, you'll need to finance or lease your new wheels.

Either way, the vehicle's residual value — how much it's worth after depreciation during ownership — will be a big factor in how much it's going to cost you and also suggests how much you'll be able to sell it for on the used-car market.

A look at SUV residual values provides the opportunity to draw some generalities about the segment:

• Quality models from quality manufacturers always have the highest resale values.
  
  
• Unique luxury SUVs, such as Volvo's XC90, maintain their value, on the whole, better than more mainstream brands. However, a "badge-engineered" luxury SUV that's based on a basic model from another nameplate often won't recoup its added cost. Buick's midsize Rainier is closely related to the Chevrolet TrailBlazer, but the Rainier is priced considerably higher than its cousin.
  
  
• Large cash-back incentives on new models hurt the resale value of their used brethren.
  
  
• With the exception of Toyota models, old-fashioned, body-on-frame SUVs don't hold their value as well as newer, car-based SUVs.

Why Are Residual Values Important?

With a projected residual value of 62 percent after three years, Toyota's Sequoia leads the full-size SUV segment for 2005.

If you're leasing the vehicle, the residual value at the end of the lease will directly affect how high your payments are: the higher the residual, the lower the payments.

If you're financing the vehicle, one with a higher residual value will let you recoup more of your money when you sell it. It will also help keep you from being "upside down" in your loan — meaning you owe more on the vehicle than it's worth.

In 2004, more than 38 percent of cars traded in were in an upside-down condition, according to a survey by the Power Information Network, a subsidiary of J.D. Power and Associates in Troy, Mich.

What Affects Residual Value?

If you're buying an SUV, many factors can affect the residual value. The primary one is the brand. As with most other vehicle categories, SUVs made by Honda and Toyota fare the best, all other factors being equal.

But other factors are never equal — especially with SUVs because they're so diverse. The segment covers everything from gargantuan trailer-towing rigs like the Chevrolet Suburban to the diminutive Toyota RAV4.

The Automotive Lease Guide tracks wholesale vehicle values, their mileage and options at 97 percent of used-vehicle auctions across the United States. These residual values, which are used by leasing companies to calculate monthly payments, are based on wholesale prices to dealers, and not what you could get selling the car yourself. ALG starts with this data and adds in predictions of economic effects and year-to-year improvements on individual models in order to predict future residual values. According to ALG data, a few axioms hold true across the SUV spectrum:

Porsche's Cayenne has a high starting list price, but it's expected to have a residual value of up to 60 percent three years from now.

• Automatic transmissions, air conditioning, and power windows and door locks are essential for maximum resale value.
  
  
• Likewise, families appreciate third-row seats in their SUVs for those occasional trips to the airport to pick up relatives or to haul the kids' friends to gymnastics meets.
  
  
• Overall, luxury SUVs tend to hold their value better than those with more plebian nameplates. While they're not at the top of the list, Acura, Lexus, Porsche and Volvo have models in the top 10.
  
  
• As in other vehicle categories, Honda and Toyota products — including the companies' respective luxury brands, Acura and Lexus — top the charts for their reputation of reliability.
  
  
• As a whole, buyers are turning away from big, old-fashioned, truck-based SUVs that have a heavy ride and ponderous handling. Instead, consumers are embracing car-based SUVs — boxy wagons that look like SUVs but drive like cars.
  
  
• Most cars have higher resale values in summer months — especially in northern climes — when more buyers are out shopping. SUVs are no exception here. Four-wheel-drive models that are more capable in snow soften this cycle somewhat.

Kelley Blue Book also provides residual value information, and three of the top 10 2005 vehicles that KBB predicts will retain the most value after five years of ownership are SUVs: the Lexus GX 470, Porsche Cayenne and Volvo XC90.

Today, depreciation rates are highest on traditional truck-based SUVs for several reasons. First, automakers are adding big incentives to sell new truck-based SUVs, and this depresses prices for used models. When it's easier for buyers on a budget to afford to buy new, why should they settle for an older, used SUV? Honda and Toyota, on the other hand, prop up the resale value of their products by refusing to offer cash-back incentives to consumers — when they need to move the metal, they often hide the cash as a dealer incentive or in subvented leases and low interest rates so new cars don't look cheaper to used-car shoppers.

With expected residual values of up to 59 percent, the Honda CR-V (pictured) and the Toyota RAV4 are the only compact SUVs in the top 10 list.

Second, as car buyers have embraced "crossover" SUVs and automakers have been slow to change their product lineups, a glut of used truck-based SUVs has flooded the market, depressing values further. Crossovers, however, are in short supply. As vehicle design cycles catch up with consumer demand, crossover resale values should begin to come down while big SUV values should stabilize, said Matt Walker, a spokesman for ALG.

Third, fuel prices are also playing a short-term role in turning away buyers from the biggest SUVs and toward crossovers, Walker said. "What we're seeing is an increase in popularity of big V-8s and four-cylinders, and decreasing interest in V-6s," says Tom Libby, an analyst with PIN. But Libby also notes that it's too early to tell if gas prices will stay high long enough for consumers' increased interest in smaller engines to translate into increased residual values.