What is car depreciation and how does it work?

A car is often an essential part of life, getting us to where we need to be and opening up the joy of exploring on the open road. You can’t put a price on the convenience and freedom a car can bring.

But when it comes to actual monetary value, you absolutely can put a price on it, and that price will go down over time. This is known as depreciation, and although it’s unavoidable, there are things you can do to minimise the impact of it. Let’s take a look.

What is car depreciation?

In a nutshell, depreciation is how much value a car loses over time. It’s the difference between a car’s value when it’s brand new, and its value when or if you come to sell it further down the line.

Just like death and taxes, depreciation is a fact of life. It affects the vast majority of cars, and the impact it can have depends on lots of things, including mileage, wear and tear, and the make and model.

How does car depreciation work?

New cars gradually lose their value over time. The amount of value they lose - and how quickly - varies widely from one make and model to another, but the biggest drop typically happens in the first year.

Depreciation starts from the moment you buy a new car, and the average new car will typically lose anything from 15-35% of its value in the first year alone. Pretty steep, right? After that, cars can go on to lose an average of 10% of their value every year.

New cars lose their value faster than used cars, because depreciation rates slow down as a car gets older. Even a two year-old car that’s been well looked after might cost much less than a brand new model of the same vehicle, because the older car will have already lost as much as 40% of its value.

The speed at which a car loses its value - known as the rate of depreciation - varies from one make and model to the next, and it’s affected by lots of factors. Here’s a general guide to give you an idea of how much you can expect your car’s value to drop during its first few years:

• Year 1 - a car depreciates by 15-35%, so it’s worth 65-85% of its original value
• Year 3 - a car depreciates by 40-60%, so it’s worth 40-60% of its original value
• Year 5 - a car depreciates by 60-70%, so it’s worth 30-40% of its original value

What factors affect car depreciation?

Depreciation affects almost all cars (apart from some rarer classics), but some cars depreciate more quickly than others. There are tons of reasons for this. The main things that affect car depreciation are:

Mileage

On average, you’d expect a car to do around 10,000 miles a year. If a car has driven further than this, then it’ll be worth a bit less, because higher mileage means more wear and tear.

Condition

Any damage to a car’s bodywork, interior and exterior will bring its value down. On the other hand, a car that’s been well looked after and is in great condition is more likely to keep some of its value.

Make and model

Some makes of car hold their value better than others - for instance, leading car models from makes that have a reputation for being reliable will usually depreciate more slowly. On the other hand, if you’re buying a car that has a reputation for breaking down, it’ll be less attractive to potential future buyers, and will depreciate at a faster rate.

Previous owners

The fewer people who’ve owned the car, the better. If a car has had quite a few owners, you’re trusting that all those owners have looked after it. This means there’s more of a chance the car might have had issues in the past.  You can check the number of previous owners on the car’s logbook or V5C registration.

Service history

If a car has a complete service history, it’s more likely to hold its value for longer, because there’s evidence that it’s been well maintained. The service book should have stamps or receipts showing that the car’s been serviced in line with the manufacturer’s recommendations.

Warranty

If there’s a long warranty left on the car, this can be a bonus when it comes to selling. Some manufacturers can offer up to seven years of cover, and this can help the car maintain a high resale value, and slow down the depreciation rate.

Size

Generally speaking, bigger luxury cars tend to depreciate faster than smaller, more practical cars, because they’re more expensive to run and maintain.

Fuel economy

The more miles you can get per gallon, the more attractive the car is to many buyers.

As well as the specifics of the actual car, the rate of depreciation can be affected by wider considerations too. For instance, environmental regulations might mean that a gas-guzzler with high emissions loses its value quickly, or a squeeze on the cost of living might make more economical cars more desirable, and therefore, more valuable.

Why does car depreciation matter?

If you’re thinking that the idea of car depreciation feels a bit theoretical, you should know that there are practical reasons to keep it in mind.

If you’re buying a new car, it’s sensible to think about when the car will see the biggest drop in its value. This tends to happen in the first few years, and then it typically slows down once the car is three or four years old. If you’re eyeing up a used car, think about whether you’re likely to want to sell it at some point. The depreciation will have an impact on how much you can get for it when you sell it on - or trade it in for a new one - so try to work out how much it’s already depreciated, and what’s likely for the next few years.

When it comes to buying a car on Personal Contract Purchase (PCP) or Hire Purchase (HP) finance agreements, depreciation matters because it affects how much you pay. The finance company will take the car’s projected future value into consideration when they’re working out what your final payment should be at the end of your agreement.

Can you reduce the impact of depreciation?

It’s not all doom and gloom. You can’t stop your car from depreciating, but you can take action to help reduce the impact. Here’s some things you can do to help maintain more of your car’s value for longer:

• Keep the mileage low
• Look after the car - repair any damage as soon as you can, and get the car serviced regularly, in line with the manufacturer’s guidelines. Keep all the car documents and service records together in one place.
• Avoid pimping your ride with unnecessary modifications like spoilers, wide wheels and flared wheel arches - these may give your car that little something extra, but they’ll make it harder to sell on in the future.
• Do your research before you buy a car - check how much values have dropped on older models and similar cars from the same manufacturer. This will give you an idea of potential resale value.

How to calculate car depreciation

To work out how much your car has depreciated, all you need to do is subtract the current value from its original list price. The difference between these two figures is the amount it’s depreciated.

The amount your car is worth now is sometimes called the residual value. You can get an idea of this by checking online for similar models, in a similar condition and with a mileage close to yours for sale.

If that sounds like a bit of a faff, you might want to use a depreciation calculator - there are plenty of these available online, many of them for free, and they’re a handy way to get an idea of how much your car’s depreciated.