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How car depreciation affects your car’s value

Learn how depreciation works and save money on your next car sale.

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Peter Carleton
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How does car depreciation work?

Car depreciation is the rate at which vehicles lose value over time. While every vehicle is subject to depreciation, the rate of value loss varies among vehicles.

Vehicles lose value from the second they leave the lot to the day they’re written off. In fact, most new vehicles are worth 20% to 30% less after the first year. Find out how knowing the ins and outs of depreciation can save you money.

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 a decrease in value of about 15% to 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.

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 depreciation

Cars depreciate most in the first year, but level out in the following years. On average, new cars depreciate 25% by the end of the first year and about 17.5% each following year.

Use this formula to calculate depreciation on a new vehicle:

  • Value after first year: Price of new vehicle x 0.75
  • Value after second year: Value after first year x 0.825
  • Value after third year: Value after second year x 0.825
  • Value after fourth year: Value after third year x 0.825
  • Value after fifth year: Value after fourth year x 0.825

Car depreciation calculator

Take a 2018 Ford F-150, for example. It has an MSRP of $27,705 for a regular cab model. Using the formula above, here’s how much that car would be worth after each year:

  • Value after first year: $27,705 x 0.75 = $20,779
  • Value after second year: $20,779 x 0.825 = $17,142
  • Value after third year: $17,142 x 0.825 = $14,142
  • Value after fourth year: $14,142 x 0.825 = $11,667
  • Value after fifth year: $11,667 x 0.825 = $9,625

Top 4 ways car depreciation affects car insurance?

Your car’s value over time affects your car insurance rates in a few ways.

  1. 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.
  2. 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.
  3. Coverage maximums. You might not need high coverage maximums on a car that’s not worth much anymore.
  4. Coverage types. You can typically drop collision and comprehensive coverage on an older car once the cost of coverage exceeds your car’s value. For example, you could save $500 a year by changing to a liability only plan and pay for damages yourself on a car that’s worth $1,000.

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Do all cars depreciate at the same rate?

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:

Age

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.

Mileage

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.

Gas prices

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.

Brand

Some vehicle brands maintain their value better than others thanks to repair costs, warranties, demand, expected life cycle and other variables.

Paint color

Some colors are in higher demand than others. If you choose a color that stands out, fewer people may be willing to buy your vehicle, which could hurt its resale value.

Accident history

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.

Configuration

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.

Running costs

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.

Newer models

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.

Warranty

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.

Which cars hold their value best?

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.

Here are some of the slowest depreciating cars from 2018 according to top car value sites Edmunds and Kelley Blue Book.

Compact

Midsize

Large and full size

Compact SUV

Midsize SUV

Large SUV

Truck

Minivan and van

Sports car

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 three 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 color. Believe it or not, the color 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 colors 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.

Bottom line

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 options.

Common questions about car depreciation

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