What is car depreciation?
Car depreciation is how much value a vehicle loses over time. Each vehicle depreciates at a unique rate depending on factors like its make, model, age, accident history and maintenance record.
Vehicles lose value from the second they leave the lot to the day they’re written off. In fact, after just the first year most new vehicles are worth 20% to 30% less than their purchase price. Keep reading to learn how understanding the ins and outs of depreciation can save you money.
How does car depreciation work?
The rate a car depreciates varies depending on whether the vehicle is new, used or leased. Let’s take a closer look at how depreciation works for each option.
New car depreciation
New cars depreciate the fastest. Most new cars lose about 10% of their value as soon as they’re driven off the lot, and another 10% to 20% by the end of the first year. After that, you’re looking at the average depreciation rate of a car landing between 15% and 25% per year, for an average loss of over 60% by the fifth year.
If you plan to sell or trade in your vehicle within five years of buying it, you’ll likely lose a significant amount of the car’s value to depreciation.
To help give you an idea of how car deprecation works on a new car, the table below shows an example of how a new, compact car with a MSRP of $24,465 could depreciate over 5 years.
Used car depreciation
Because depreciation is most drastic in the first year, you could save roughly 20% to 30% by buying a used vehicle that’s one year old. After the first year, depreciation averages about 17.5%, so you could save even more if you’re open to buying an older vehicle. Plus, when it comes time to sell or trade in your vehicle, it’ll retain more of its value.
Leased car depreciation
Instead of buying new or used, you could also choose to lease. The lease price includes the cost of depreciation, plus tax and interest, and has a set buyout price for the expected residual value of the vehicle. Once your lease is up, you won’t need to worry about selling the car at a loss. Simply hand over the keys to end your lease or buy it out, which can be profitable if its resale value is more than the buyout price.
How to calculate car depreciation
Cars depreciate the most in the first year, but level out in the following years. The average depreciation rate of a new car is 25% by the end of the first year and about 17.5% each following year.
This is how you would use this formula to calculate car depreciation on a new vehicle:
- Value after 1 year: Price of new vehicle × 0.75
- Value after 2 years: Value after 1st year × 0.825
- Value after 3 years: Value after 2nd year × 0.825
- Value after 4 years: Value after 3rd year × 0.825
- Value after 5 years: Value after 4th year × 0.825
Car depreciation calculator example
Take a vehicle with an MSRP of $27,705. Using the formula above, here’s how you would calculate the car’s depreciation after each year you own it:
- Value after 1st year: $27,705 × 0.75 = $20,779
- Value after 2nd year: $20,779 × 0.825 = $17,142
- Value after 3rd year: $17,142 × 0.825 = $14,142
- Value after 4th year: $14,142 × 0.825 = $11,667
- Value after 5th year: $11,667 × 0.825 = $9,625
The car depreciation chart below illustrates how the value of a car decreases the most in the first year. As the car gets older the curve levels out and the value drops less severely from year to year.
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Top 4 ways car depreciation affects car insurance?
Your car’s value over time affects your car insurance rates in a few ways.
- Car value. Higher MSRP means higher insurance rates. An expensive car requires pricier repairs and is more costly to replace. A low-cost used car is cheaper to repair and will get better insurance rates.
- Safety. An older car with poor safety ratings that doesn’t have the latest safety features won’t benefit from safety device discounts or a cheap rate.
- Coverage maximums. You might not need high coverage maximums on a car that’s not worth much anymore.
- Coverage types. You can typically drop collision and comprehensive insurance coverage on an older car once the cost of coverage exceeds your car’s value. For example, you might save hundreds of dollars a year by changing to a liability only plan and paying for damages yourself, assuming damages don’t amount to very much.
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What factors impact how fast a car depreciates?
Whether you buy new, used or lease a vehicle, they all depreciate at different rates. Factors that influence how quickly a car loses value include:
The age of a vehicle is the biggest factor in depreciation. New vehicles depreciate the most in the first year, but the rate levels out to about 15% per year after the first couple of years.
How much you drive can influence wear and tear, which directly affects depreciation. By keeping your odometer as low as possible, you can go a long way to minimizing the effects of depreciation.
The price of gas affects the cost of driving a vehicle, so a shift in gas prices can determine how well a vehicle holds its value.
Some vehicle brands maintain their value better than others thanks to repair costs, warranties, demand, expected life cycle and other variables.
Some colours are in higher demand than others. If you choose a colour that stands out, fewer people may be willing to buy your vehicle, which could hurt its resale value.
The condition of your vehicle can directly affect the rate at which it depreciates. Even if you’ve had it repaired after multiple accidents, a lengthy service history could reduce its value.
Build options can influence how the vehicle holds up over time, like the drivetrain and transmission. Manual cars might also be harder to sell than those with automatic transmissions.
Supply and demand
If demand outweighs supply, prices will go up. Conversely, if there are more sellers than buyers, resale value may go down.
Maintenance and service fees are a reality of owning any vehicle. If a car is expensive to maintain, people may be less likely to buy it, meaning it would depreciate faster.
If newer models have major improvements or incentives to buy them, older models could depreciate faster. The opposite can also be true — if a vehicle is discontinued or the newer version is worse than older models, the older models may hold their resale value better.
Taxes and subsidies
Both can affect the cost of ownership, which may impact the rate of depreciation. For example, if the government is offering a subsidy for hybrid vehicles, people could be more likely to buy them, which may lead to higher resale values.
Most vehicles come with a new vehicle warranty, some of which are even transferable to new owners. Having a valid warranty could help maintain or improve resale values and reduce depreciation.
Car depreciation by brand and model
Depreciation is the most influential factor in the long-term value and total cost of ownership of your car. But some cars hold their value better in the long run.
According to J.D. Power, the best brands for car depreciation in 2022 are Toyota, Chevrolet, Lexus, GMC, Mercedes-Benz and Subaru. These car brands were projected to have the highest percentage value of the original MSRP after a 3 or 4-year period.
Here are some of the slowest depreciating cars in 2020 according to the Canadian Black Book:
|Compact Car||Toyota Prius v|
|Compact Commercial Van||Chevrolet City Express|
|Compact Luxury Crossover-SUV||Porsche Macan|
|Compact SUV||Jeep Wrangler|
|Full-Size Car||Toyota Avalon|
|Full-Size Crossover-SUV||Toyota Sequoia|
|Full-Size Luxury Crossover-SUV||Mercedes-Benz G-Class|
|Full-Size Pick-Up||Ford F250 Super Duty|
|Full-Size Vans||RAM ProMaster 3500|
|Luxury Car||Lexus GS-Series|
|Mid-Size Car||Honda Accord|
|Mid-Size Crossover-SUV||Toyota 4Runner|
|Mid-Size Luxury Crossover-SUV||Mercedes-Benz GLE-Class|
|Premium Luxury Car||Porche Panamera|
|Premium Sports Car||Porsche 911|
|Small Pick-Up||Toyota Tacoma|
|Sports Car||BMW Z4|
|Sub-compact Car||Honda Fit|
|Sub-Compact Crossover||Honda HR-V|
|Sub-Compact Luxury Crossover||Mercedes-Benz GLA-Class|
|Zero Emission Vehicle||Ford Focus|
How to limit depreciation when selling a car
While you can’t avoid depreciation, there are ways to reduce how fast it affects your car. From buying a car that has a reputation for reliability to staying up to date with maintenance, you can help your car maintain more of its value. Find even more ways to reduce your car’s depreciation.
How to take advantage of depreciation when buying a car
There are a number of ways you can use depreciation to your advantage:
- Shop for gently used cars. Many cars depreciate the most in the first 3 years, which is the same length as most standard leases. The used car market is often flooded with nearly pristine vehicles, because most leases limit your mileage and require you to keep the car in good condition.
- Buy based on the market. Some cars have a lower resale value because of popularity or other market factors, even if there’s nothing particularly wrong with the model. Watch out for cars that have poor resale value because they’re genuinely lower in quality though.
- Lease to buy. When you lease a vehicle, the price includes the estimated cost of depreciation, and your contract will often state the guaranteed buyout price once the lease is over. In some cases, the actual resale value of the vehicle will be lower than the buyout price, meaning you can buy the vehicle at a discount.
- Choose the right colour. Believe it or not, the colour of your new car can have a huge impact on how much it will depreciate in the coming years. White, black, silver and grey cars are always popular and therefore better at maintaining value. Keep in mind that some limited-run colours may hold their value better due to low supply and high demand.
- Drive your car into the ground. If you buy a new or used car and don’t plan to sell it, you won’t need to worry about depreciation.
How to maintain your car’s value
- Stay on top of maintenance. Used car buyers want to purchase a vehicle that’s been taken care of. Follow your car manufacturer’s maintenance schedule, enter each service in the logbook and keep your receipts.
- Keep it clean. If your car is home to strong and unpleasant odors, don’t expect to get a high price when the time comes to sell.
- Low mileage. As much as possible, keep your mileage to a minimum. Your car loses value the more miles you put on it.
- Check engine light. Don’t ignore those warning lights on your dashboard if one pops up. Get your car in to be diagnosed asap.
- Be sparing with mods. A sky-high spoiler can be tempting, but it may also negatively impact your car’s resale value.
While car depreciation affects every make and model differently, you can reduce the impact by understanding how it works. Shop for a car that’ll save you money on insurance and depreciation in the long run by comparing your insurance options.
Common questions about car depreciation
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