Car depreciation: an extensive guide with charts

What is depreciation?

Depreciation refers to the difference between the price of a car when you buy it versus when you sell it. This may not seem like a huge factor when you purchase the car, but it will be when it’s time for you to sell.

The average new car will lose up to 60% of its value within the first three years of ownership. However, the rate of depreciation isn’t consistent across all makes and models.

Car depreciation chart

As an example of the differences in depreciation rate between manufacturers and models, we’ve included the graphs below. They show how the value of an Audi A3, BMW 1 Series, and Mercedes A Class will depreciate over 15 years.

What causes depreciation?

There are a number of factors that can cause the value of a car to drop, and will also explain why some cars depreciate more rapidly than others:

• Mileage

  The average car drives around 7500 miles per year. The more miles you drive, the more your car is likely to lose value.

How does mileage affect car value?

• Service history

  Cars need should to be serviced every 12,000 miles, or once every 12 months - whichever comes first. Keeping a record of every service in your car’s service history book will shows that the vehicle was has been serviced in line with any manufacturer recommendations.

• Reliability

  Some manufacturers and certain specific car models might have a reputation for unreliability and can lose value faster as a result.

• Length of warranty

  A standard warranty of three years is good, but some manufacturers now offer warranties as long as seven years, which is a real bonus when it comes to selling your car.

• Fuel economy

  If your car has a good MPG rating, then its value shouldn’t depreciate as rapidly.

• Road tax

  Cars that guzzle fuel cost a lot more to tax each year, making them less desirable when being purchased by second-hand buyers.

• Number of owners

  Check the car’s logbook or V5C registration to see how many owners the car has had. As a rule of thumb, the fewer owners, the better.

• Makes and models

  Some models are frequently updated by manufacturers, whereas some cars are released and won’t be reworked for the next decade. The more recent the model of car, the more value it will likely hold onto.

Why depreciation is an important factor to consider

When buying a new car, depreciation might be the last thing on your mind. However, like it or not, a car is a big investment, and you should try to assess its depreciation potential. If it helps, consider that your car's depreciation might even be a more significant cost factor than fuel economy over the long term.

Additionally, if you get into an accident and your car has to be scrapped, you could see yourself losing when your insurer pays out. This can be mitigated by GAP insurance, which covers the difference between what you paid for a car and what your insurer will pay out if it is written off or stolen. A GAP insurance policy will pay out the current market value of your car. This will still probably be lower than the original cost but will reduce the impact of depreciation.

How to minimise car depreciation

Outside of some specific older cars, such as the BMW Z4M, which may actually increase in value over time due to scarcity, you’re never going to be able to stop your car from depreciating at all. However, there are actions you can take to mitigate the effects of depreciation – stopping your car from losing value at a faster rate than expected.

• Try to keep your mileage down. If you know you’re going to be driving more than the average person, then perhaps it’s not the best idea to purchase a new car.

• Keep your car well maintained and repair it as soon as possible the minute you notice any damage.

• Avoid modifying your car in any way. Whilst this might be desirable for you, it can cause your car’s value to tumble.

• When choosing the colour of your car, try to go for something basic and popular. What looks cool and outrageous to you might not to a potential buyer.

• Try to sell your car at the right time of year. This won’t stop depreciation, but it will help you make the most of the money possible. For example, try to sell a convertible in the summer and not in winter.

• Keep an eye out for any newer models, and if an updated version of your car is due to be released you may want to sell before this happens.

• Do some thorough research before you initially buy. This will give you a rough idea of how your car will depreciate, and you can decide if you want to choose another make or model.

Depreciation and car finance

When you purchase a car on finance, the total amount you pay overall is usually much higher than the actual value of the car due to interest. Therefore, depreciation is a massive factor to consider when selecting a car on a finance plan.

What’s more, as we’ve already mentioned, you could lose out when it comes to insurance in an emergency. Strongly consider GAP insurance if you have a car on finance, as depreciation could see pay outs making less than a dent in your remaining finance balance.

How do running costs affect depreciation?

When it comes to depreciation, it's important to understand how running costs affect the equation. For example, a car that is driven 10,000 miles per year will have a higher depreciation value than a car that is only driven 1,000 miles per year. This is because the car that is driven more will experience more wear and tear.

Maintenance and repairs will also affect depreciation, so if a car is well-maintained, it will hold its value better than one that isn't. Another thing to consider is fuel economy - a car that gets good fuel mileage will lose its value slower than one that doesn't. Ultimately, the amount of money you spend on running your car will have a direct impact on how much it depreciates.

In general, the more a car is driven, the faster it will depreciate. Cars that are used for short distances or only on weekends will generally have a higher value at resale than those that are used for long distances or every day.

How fast can my car depreciate?

When you buy a new car, it usually starts to lose its value the minute you drive it off the lot. Generally speaking, the average car loses 20% of its value in the first year alone. Depreciation in most cases does slow down after the initial year, with cars losing an average of around 33% of their value after three years and almost 50% after five years. However there a number of additional factors that affect how fast a car depreciates, including the age and make of the car, as well as the different factors mentioned above.

Considering car depreciation when selling or buying a new car

When you are buying or selling a car, it is important to consider the depreciation of the vehicle. Depreciation is the decrease in a car’s value over time. This means that a new car will lose value as soon as you buy it, and it will continue to lose value until it is sold. The rate of depreciation varies depending on the make and model of the car, but it is important to be aware of how much value a car will lose over time.

Thinking about how you’re going to sell a vehicle is something that should be considered before you even purchase it. When you’re looking at your budget for your next vehicle, it is important to factor in how much ownership will cost you until you come to sell the vehicle. If you’re buying a new car then you need to be more comfortable with a higher rate of depreciation.

In most cases, as discussed above, as soon as you put a few miles on your brand new car, it can depreciate by up to 20%, but many people are comfortable with this, as having the manufacturer warranty protects them from other unforeseen costs they might incur if they bought a vehicle that is older and already towards the bottom of the depreciation curve.

How can I calculate the rate of depreciation?

There are a few different ways that you can calculate the rate of depreciation for a car. The simplest way is to do the following; if you’re looking at buying a 1 year old car and selling it at 4 years, look at what a 4 year old version of the car is selling for online (make sure to factor in other such as what you expect the mileage will be). You can then take the figure of what the 4 year old car is worth from the purchase price of the one you’re buying to identify the depreciation cost.

A more scientific way to calculate depreciation is to use the straight line depreciation method. This calculates the rate of depreciation by dividing the cost of the car by the number of years that it is expected to last. To use the straight line depreciation calculation method, you'll need to know the car's purchase price, its sellable value (what it's worth when you sell it), and its estimated useful life. You can then calculate the car's depreciation for each year by dividing its purchase price by its estimated useful life.

Another way to calculate depreciation is to use the declining balance depreciation method. This calculates depreciation by multiplying the original cost of the car by a percentage that decreases each year. The percentage used for calculating depreciation will vary depending on how long you expect the car to last.

A third way to calculate depreciation is to use the sum-of-the-years' digits method. This calculates depreciation by adding up all of the digits in the year that the car will be retired and then dividing that number by 9. This method gives a more accurate estimate of how much value a car will lose each year.

Depreciation across makes, models and trims

It’s important to know how depreciation affects different car makes and models, as this can influence your decision on what car to buy.

There’s no doubt that depreciation varies across different makes and models of cars. Some cars lose their value more quickly than others. The make, model and trim of a car all play a role in how much it depreciates. A good example can be seen with the Audi A3/S3/RS3 and then the specific trims within them. The mass produced A3 has a really high depreciation rate because there are a lot out there. As you move up into an S3 and then the RS3 these cars hold their value more because they are rarer, more expensive to purchase and generally owned by enthusiasts that look after their cars and going for a higher specification within each of those levels will also slow depreciation further.

Worst cars for depreciation

Luxury cars and SUVs

Luxury cars are always some of the worst offenders when it comes to depreciation. A high-end sports car or luxury sedan can lose as much as 60% of its value in just the first three years. If you're looking for a car that will hold its value well, stay away from the luxury segment. This is also influenced by business owners leasing these kinds of vehicles which once they finish their lease go into the general market driving their value down.

New models

Whenever a new generation of a vehicle is released, it impacts the value of the “old shape”. This is also impacted when manufacturers do a “mid-life facelift” of models where and make small tweaks to a vehicle model to improve it a few years after initial release.

Sports cars

Mainstream sports cars and luxury performance vehicles tend to be impacted by depreciation a lot more aggressively than other vehicles. The majority of sports cars are mass produced and are big sellers. Supercars are also victims of depreciation and lose a lot of value over the years unless they are limited edition variants.

Best cars for depreciation

Hatchbacks

Not only are hatchbacks stylish, they are affordable and practical at the same time. They're also relatively easy to sell on when you want to upgrade, so if you're looking for a car that will retain its value well, a hatchback is a good option. Cars with a smaller engine generally tend to hold their value better than those with a larger engine. This is because smaller engines are more fuel-efficient, and so they are more popular with drivers who are looking to save money on petrol and appeal to the mass market.

Minivans

Minivans may not be the most exciting vehicles on the road, but they are extremely practical and tend to depreciate at a slower rate than most other types of cars. This is because there isn’t a great supply of them and they are a vehicle fit for a purpose rather than catering to everyone.

Vintage Cars

Vintage cars are always a good investment, as they tend to retain their value over time better than other types of cars. This is due to their rarity and the fact that they are not often produced anymore, meaning that there is limited supply compared to demand and they are theoretically at the bottom of their depreciation curve. As a result, if you have a vintage car that is in good condition, it is likely to be worth a lot more than a newer model. They tend to hold their value very well and can be sold for a high price if you ever decide to sell them. There are many different types of vintage cars, so it’s important to do your research before investing in one.

Electric vehicles

Although electric vehicles are becoming more and more popular, they have yet to catch on with the general public. When fuel prices are high, electric vehicles are in demand and hold their value particularly well. A word of warning: although business owners are currently incentivised to go electric for their company vehicles, in a few years when mass adoption has occurred and these used vehicles end up in the marketplace, it is expected that electric vehicle depreciation will eventually reach the same rate as petrol vehicles.

If you're looking to purchase a car and don't want to be hit with a huge financial hit when it eventually comes time to sell, then you need to know what the best cars that hold their value are.

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