Getting to Grips with Car Depreciation

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What you should know about your vehicle's diminishing value

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What is the value of my car? Or rather, how much is my car worth? It's a question that all of us ask when it's time to trade-in, sell, or upgrade to a newer model. Quite simply, depreciation is the difference in the value of a vehicle when it was purchased relative to what it would be worth at present. Besides some rare exotics, the vast majority of models will depreciate over time as mileage increases and wear and tear takes its toll.

While age may be one of the main reasons for your SUV or sedan depreciating, it's not the only one. Some models depreciate more rapidly due to any damage it sustained during ownership, a reputation for poor dependability, or if it plays in a certain segment. Full-size luxury sedans, for instance, are notorious for depreciating at an especially rapid rate.

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How Quickly do Cars Depreciate and How Much is My Car Worth?

As soon as you drive off the showroom floor, your car begins to depreciate. While the pace of this varies depending on a range of factors, research suggests that the average new car price will decrease by around 10 percent immediately, as soon as you take ownership. The biggest drop in value comes in year one when your vehicle's worth drops by around 20 percent. After around five years, you can expect the average new vehicle to retain in the region of 40 percent of its original value.

Depreciation Formula: Calculating a Car Price Estimate

What is my $40,000 vehicle worth, you may ask? Using this figure as an example and the formula explained above, we can calculate that your car will immediately be worth around $4,000 less when you take ownership. After 12 months, its value will decline to $32,000 and, after half a decade, that number drops to around $16,000. This is merely an estimate of your car price in the future as a used model. Bear in mind that some models will depreciate either more or less rapidly.

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What to Look Out for When Buying a New Car

It's tempting to buy a new car based only on which model panders most to your emotions, but the rate at which a new car depreciates must be taken into account. However, it takes a bit more effort to make a sound financial decision and buy a vehicle that can be resold at a decent price. These are the key points to look out for:

  • Vehicle types, such as trucks or luxury sedans
  • Choice of brand
  • Initial purchase price vs depreciation rate
  • Buying new or used
  • Industry perception of reliability and quality

By taking these factors into consideration and combining them with your own needs, you can make the best possible decision. For instance, a lower used car value means that you can bag a brilliant second-hand deal. This is because a pre-owned vehicle has already experienced its initial sharp drop in value. Other than depreciation, there's a lot more to consider when buying a new car.

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The Causes of Car Depreciation

You can Reduce Depreciation by Opting for the Best Value Cars

Your car's declining value is inevitable, but manageable to an extent. By paying attention to the below factors, such as what vehicle type you choose, you can slow down your existing model's pace of depreciation. They can also help you to make the best decision if you are buying a brand new car:

  • Age and Mileage - Perhaps the most obvious of all these points, an old car with more miles will have a poorer resale value.
  • Accident History - An accurate vehicle history report should indicate prior accidents, even those that are minor. Because most buyers want a car with an entirely clean report and that is in original condition, any previous damage can lower the value.
  • Reputation - Models from automakers associated with building dependable vehicles tend to hold onto their value better.
  • Luxury Models - Expensive luxury vehicles depreciate more quickly than many other vehicle types. By brand, we find that USA and European models are particularly vulnerable.
  • Trends - Right now, SUVs and crossovers are in high demand in the US and represent cars that hold their value quite well, along with the perennially popular pickup truck such as the Toyota Tacoma and GMC Canyon. However, sedan sales have declined and are depreciating at a faster pace.
  • Electric Vehicles - EVs tend to exceed the average new car price, so are prone to losing even more value over the same period. As they're still less of a known quantity than conventionally-powered vehicles, this also affects resale.
  • Fuel Economy - With more stringent emissions regulations, gas-guzzling vehicles can see a sharper drop in value.

When asking yourself, "What's my vehicle worth?", the above key points are worth remembering.

Tips on Reducing Your Vehicle’s Rate of Depreciation

What’s My Vehicle Worth and How Can I Positively Influence its Value?

Although some factors are out of your control, it's possible to slow the pace of vehicle depreciation. You can start by keeping your mileage down by, for instance, carpooling or going for one big shop instead of many quicker trips. If you are willing to buy a second-hand vehicle in its second or third year of life, it would already have seen the worst drop in value so is likely to depreciate more slowly once you take ownership.

Finally, how long do your cars last? This is an important question as a well-maintained vehicle holds onto its value that much more strongly. Our advice is to keep up with your services and conduct regular preventative maintenance to extend its life as long as possible.

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FAQs

What’s my car worth and how do I calculate its depreciation?

Based on our earlier car value guide, a new car will shed approximately 10 percent of its value immediately. Many examples of a car value calculator will demonstrate the same drop in value. After 12 months, you can expect a dip in the value of 20%. Following this, most cars depreciate by between 15 to 25% per year until it is five years old. Using your chosen vehicle's MSRP - excluding tax and other charges like destination fees - as a starting point, you can work out the speed of depreciation over 60 months.

How much do cars depreciate monthly?

Based on the above figures, you can arrive at a future car value estimate. A $40,000 model loses about $666 in value every month over the course of the first year. However, this rate will decline over the next four years.

What is the formula of depreciation?

While no depreciation calculator or formula is entirely accurate, they do give you a decent idea of what your car could sell for in the future. Using your car's new price as a starting point, you can subtract around 20 percent of that annually for the first five years to gauge what it will be worth. Or, you can simply subtract 60% of the initial cost to check the car value at the five-year mark.

What car loses value the fastest?

The specific car with the highest drop in value after five years changes over time. However, there have been some regular offenders. Luxury sedans like the BMW 7 Series and Mercedes-Benz S-Class have been shown to shed around 70 percent of their value by year five. Some EVs are also prone to similarly heavy losses, such as the Nissan Leaf and the Chevrolet Volt. By model and body type, the cars that retain value best over five years tend to be SUVs and crossovers. The Jeep Wrangler is a good example.

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