You can save money by knowing how it works.
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.
What is car depreciation?
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.
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.
Which cars have the best depreciation value?
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.
Minivan and van
Research resale valuesWant to know how much your car will be worth in three or five years? Start researching resale values through a car valuation service such as Kelley Blue Book, which offers a “My Car’s Value” option to help you work out how much your vehicle is worth now and will be in the future.
Many organizations such as AAA include depreciation in their car operating costs. Use this data to find the makes and models most likely to hold their value in the future.
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 and features. 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.
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
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
How to limit depreciation when selling a car
While you can’t avoid depreciation, there are ways to reduce the rate at which it affects your car. Here are a few strategies you can use:
- Drive safely. Accidents — especially major ones — can lead to repairs that speed up depreciation.
- Look after your car. Stay up to date with maintenance and keep your car in good shape. Routine oil changes, wheel rotations, detailing and other services can reduce depreciation. Keep your receipts for proof if requested.
- Limit your mileage. Cars with higher mileage depreciate faster.
- Buy used or lease. Buying a slightly used vehicle, even if it’s just a year old, can help you avoid some of the costs of depreciation. Leasing also includes the cost of depreciation, and you may be able to get a good deal if the car’s actual resale value is higher than the buyout price at the end of your lease.
- Choose the right car. The rate of depreciation can vary with respect to your car’s make, model, reliability and other factors. Choose a car with good fuel economy, low running costs and a reputation for reliability.
- Look for a warranty. Having a warranty can slow the rate of depreciation, especially if it’s still in force when you decide to sell the vehicle.
- Choose desirable options. Choose features and build options that improve the vehicle and increase its value. For example, vehicles with automatic transmissions tend to hold value better than those with manual transmissions and have a larger pool of potential buyers. A turbocharged engine or other non-standard modifications could make it harder to find a buyer and raise your insurance rates.
- Sell at the right time. Gauge the market before selling your vehicle. For example, you’ll probably get less for a convertible if you decide to sell during the winter. And if your car’s manufacturer just updated or discontinued your car model, the resale value could go down unless it’s already a rare or desirable model.
- Sell privately. If you decide to sell or trade your vehicle to a dealer, you might receive a lower price than if you were to sell privately. Look online or for local auctions where you can sell your vehicle at a price you feel is fair.
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 though there’s nothing particularly wrong with the model. Take the Nissan Leaf, for example: It has a poor resale value due to a high battery replacement cost and flooded market from lots of trade-ins. You can take advantage of this fact and purchase the car at a lower price. 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. It’s harder to find a buyer for a car with a bold paint color.
- 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 has 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.
Is it better to buy a used car?
While buying a used car can be a great option, always weigh the benefits and drawbacks of new versus used.
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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.