Car depreciation explained
Last updated October 21, 2021
The value of a brand-new car will begin to decrease from the minute you drive it off the forecourt. If you’re buying a brand-new car, depreciation is something you should consider as much as other cost factors like fuel economy.
A car’s potential value loss varies across manufacturers and models, so depreciation can be a tricky subject to navigate. That’s why we’ve composed this handy guide to give you all the facts about depreciation and allow you to make the best decisions when purchasing a car in the future.
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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.
According to research by the AA, 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.
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:
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Mileage
The average car drives around 7500 miles per year. The more miles you drive, the more your car is likely to lose value.
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Service history
Cars need to be serviced from time to time. Keeping a record of every service in your service book shows that the car was serviced in line with any manufacturer recommendations.
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Reliability
Some manufacturers and certain specific car models might have a reputation for unreliability and can lose value faster as a result.
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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.
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Fuel economy
If your car has a good MPG rating, then its value shouldn’t depreciate as rapidly.
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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.
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Number of owners
Check the car’s logbook or V5C registration to see how many owners the car has had. As a general rule of thumb, the fewer owners, the better.
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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 an 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 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.
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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.
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Keep your car well maintained and repair it as soon as possible the minute you notice any damage.
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Avoid modifying your car in any way. Whilst this might be desirable for you, it can cause your car’s value to tumble.
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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.
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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.
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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.
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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.
