Residual Values of Small Cars to Plummet

The reason is because car manufacturers are under huge pressure to meet newer fuel economy rules that will force them to produce many more smaller, fuel-efficient cars.

Residual values are important because depreciation is usually the biggest cost of owning a new car. This is especially true if you intend to sell your car within the first five years.

With the huge influx of smaller cars to hit the market over the next several years, the residual values are expected to suffer. It's a simple law of supply and demand. When there is too much supply, prices will tend to head down.

Although residual values of smaller cars will probably head down, it's also likely dealers will be willing to negotiate better deals. If you're a smart car shopper, you can certainly use this to your advantage.

Our recommendation is to always keep a new car for more than 5 years. This will allow you to take advantage of lower depreciation costs later on, will ensure you get a good deal upfront, and limit your loss to low residual values.