Buying a new or used car can be an exciting time. Many buyers will focus their attention on the purchase price, the fuel economy, maintenance costs, and auto insurance costs. However, many drivers forget about the depreciation rate of the new car they are about to purchase.
The moment you collect your new car keys and drive away from the dealership is the moment the car depreciates. This depreciation affects both new and used vehicles; however, the potential loss of resale value varies across different brands and models. Car depreciation is a significant factor if you hope to sell your car after a few years.
Here's how car depreciation works and the formula for a vehicle's depreciation rate so you can calculate how much value your car has lost if you want to sell it or do a trade-in on another car.
What is Car Depreciation?
Depreciation is the difference between the purchase price of the car and the current value of your vehicle when you want to sell it. The car depreciation rate is the rate at which the car's value decreases over time.
Many car buyers who do factor in a vehicle's depreciation rate before buying a car will choose to buy a used vehicle instead of a brand new car. That's because new cars lose their value at a considerably higher rate than used cars. In fact, within the first three years, a car's market value can depreciate by as much as 50%, with most of this value lost in the first year. As a vehicle gets older, the depreciation rate slows down, which means buying an old car isn't the worst decision car buyers can make.
Why Does Car Depreciation Matter?
Whether you are buying a new car or ready to sell your old car, vehicle depreciation matters for several reasons:
A car's depreciation rate affects the trade-in value of your vehicle.
A high depreciation rate on a financed vehicle could have you owing more on your car loan than what the car is worth. If you owe more on your car loan than the car's value, it is known as being underwater on the loan or negative equity.
Should the car be totaled or sold while you are underwater, then you may have to pay to cover the difference owed. Consider gap coverage from an insurance company, which is also required in the case of some lease agreements.
A benefit of vehicle depreciation is that you may save on your car insurance coverage if the premium reduces as the vehicle depreciates.
If you are leasing a vehicle for a fixed amount of time, you will only pay for the depreciation or use of the car for that specific period. That can be beneficial because you will not absorb the total depreciation cost of the vehicle in the same you would have if you owned it.
How Quickly Does a Vehicle Depreciate?
Several factors affect a vehicle's depreciation value, and while we know new cars typically depreciate much faster, not all new cars will depreciate at precisely the same rate. For example, luxury sedans and electric vehicles have the highest depreciation rate because they're often sold with significant discounts that make buying a new one sometimes more cost-effective than purchasing a used one. Then, brands such as Lexus, Honda, and Porsche, have some reputation for reliability, desirability, or rare.
Here are some points in a vehicle's life when it incurs the greatest hits to its value:
When it's titled, sold, and leaves the dealership: A brand-new car will lose its value the moment you drive away from the dealership and before you have even enjoyed the new car smell. A new vehicle will lose on average between 9% and 11% of its value as you drive away.
When it is a year old: Studies show that new vehicles will lose most of their market value before it is a year-old. After the first year, it could lose somewhere around 20% of its original value, even when average mileage and still in excellent condition.
After five years: On average, a vehicle will depreciate by 15% to 25% each year until it is five years old. The car essentially will lose about 60% of its value once it reaches its five-year mark.
An analysis conducted by iSeeCars.com looked at the depreciation rate of over 8.2 million new and used cars and found the following results:
The Jeep Wrangler Unlimited topped their list of vehicles with the lowest five-year depreciation rate of 30.9%. Demand for these SUVs new is extremely high, and some dealers will even mark the original prices up because of that. That's why they're desirable on the used market, where some of the initial sticker shock has worn off.
The BMW 7 Series had the highest rate of depreciation at 72.6%. Like the BMW 7 Series, big luxury cars typically have the highest rate because of their limited appeal on the used car market, high sticker prices, and steep discounts required to sell them new. Many of them also require expensive regular maintenance once the manufacturer's warranty expires, further reducing their appeal.
Here are some vehicles with a low depreciation rate over five years:
- Toyota Tacoma: 32.4%
- Porsche 911: 36%
- Subaru WRX: 39.8%
- GMC Canyon: 41.2%
And here are some vehicles with a high depreciation rate over five years:
- Chevrolet Volt: 71.2%
- BMW 5 Series: 70.1%
- Audi A6: 69%
- Mercedes-Benz E-Class: 69%
What Causes Vehicle Depreciation?
Different cars lose their value at different rates. Listed below are some of the main factors influencing a car's value and can lead to depreciation.
Make and Model: Some makes and models hold their value better than others, for instance, Toyota. An influential factor here is a manufacturer's reputation. A vehicle with high satisfaction and reliability ratings is likely to retain more of its original value than a brand or model with a poor reputation for recalls and flaws.
Warranty: An automaker's warranty can affect a vehicle's value retention. A longer or more substantial warranty will give a car more value.
Mileage: Typically, the more mileage a car has, the higher the vehicle's rate of depreciation. Keeping those miles low allows some control over your vehicle's value retention.
Condition: This is an influential factor you can control. If the car looks worn and dirty inside and out, it will undoubtedly have a depressed value. Maintain the vehicle to help lower the depreciation rate.
Vehicles in Demand: Like fashion trends, people's tastes change in cars, leading to some more in demand than others at any given time. The ones more in demand will retain more of their value.
Fuel Economy: Along the lines of demand, used car buyers tend to want fuel-efficient cars when fuel prices are high, depressing the value of big gas guzzlers. But people tend to have short memories, so when gas prices plummet, small and efficient cars go out of style, and big V8 trucks and SUVs see their fortunes rise.
General Running Costs: Just as fuel efficiency encourages the value of a vehicle, so do the overall running costs. That includes car tax, service charges, the cost of tire replacement, and the general cost of parts, repairs, and maintenance.
How to Calculate Vehicle Depreciation:
If you want to determine your vehicle's current market value, search websites like Edmunds.com and Kelley Blue Book's KBB.com to get an idea. You can also find a car depreciation calculator online on some websites that will automate the formula.
Calculate the formula manually, subtract the car's existing fair market value for the purchase, and lower any fees and sales tax.
How to Decrease Your Vehicle's Depreciation:
While there is no skill to car buying, always keep the factors that affect depreciation at the back of your mind when buying your next car. It will help you make the right purchase, especially when it comes time to sell the vehicle. Retaining its value should remain a priority, and buying a car with a good reputation and warranty will save you money in the future.
To reduce the rate at which your vehicle loses its value, here are some steps to take.
Keep the car's mileage down: Try to limit the miles you drive by better planning commutes, errands, and trips. That will also keep fuel and wear-and-tear costs down.
Keep up with the regular maintenance: Always stay on top of a car's maintenance schedule. That includes regular and consistent oil changes and tire rotations. A well-maintained vehicle will not only retain its value better but keep it in safe working condition. Maintaining the service records also adds value in a private sale, proving to the buyer the car was taken care of by a reputable service center.
Buy smart: Since new cars depreciate faster than used, choose a used vehicle with good reliability and owner satisfaction scores and have been gently used and well-maintained.
You can also minimize depreciation by:
Avoiding modifications to your car to keep it attractive to other buyers and refraining from making changes that would void a warranty.
Avoid selling before a replacement model is released, which makes your car look like yesterday's fashion.
Maintain the interior and exterior of the vehicle, again to prove it was cared for.
Even if you plan on keeping a new car for many years, keeping the vehicle looking good and in good working condition is essential to keeping any resale value. Sometimes unforeseen circumstances require the sale of the car, or an accident or even deferred maintenance could force repairs that exceed the value of a poorly maintained car. It doesn't take too much to stave off the power of steep vehicle depreciation.