Most of us have heard that as soon as you drive your spanking-new car out of the lot, it’s worth thousands less than what you paid for it moments ago. While that’s not strictly true, cars do depreciate at a higher rate than most other major purchases. Car depreciation is simply the difference between the price you pay when you buy your car, and the price you would get today if you decided to sell it. It’s the rate at which your car’s value falls over time.
The basics of car depreciation
Any vehicle will generally be most valuable when it has just rolled off the factory production line and into a showroom. It’s brand new and pristine. You would pay somewhere close to the manufacturer listed price for the pleasure of owning it.
As a general rule of thumb, a new car that covers 10,000 miles a year will have lost around 60% of its value by its third birthday. After this initial, alarming drop in value, the depreciation rate slows a little.
But go forward five years and it will have covered around 50,000 miles. In that time, normal wear and tear and the ravages of a family will have affected various parts. It may have received the odd scratch or scrape, and someone will probably have dropped some food or drink on the interior.
So when you decide to sell, it will be for less than you originally paid.
How does it work?
For a new car, the retail price in a showroom will generally be set by the manufacturer. You may find some variation between dealers or due to special offers, but it’s unlikely to ever be worth more than you pay now. Unless it’s a classic car, or you intend to keep it until it becomes one.
Almost anything you buy becomes worth less once it has been used. One of the few exceptions to that rule is property. It’s why some car collectors will buy expensive new supercars and never actually drive them. When a car is used, various factors will start making it drop in value for potential buyers.
When a car starts being used, it will lose the value it had as a new, pristine vehicle. It’s the same as collectible toys, or most other retail items – those that are still in their packaging always collect a higher price.
The biggest drop in value will always tend to be on new cars. The majority of depreciation occurs over the first 3-7 years. At which point the potential of what your car can be worth will have dropped to the lowest it is likely to reach. It will either stay at the new value, or eventually begin to climb as a classic depending on the make, model, and desirability.
But some brands and models of car will depreciate much quicker than others. So the right choice can help you save up to 40% of the value of a new car.
What factors contribute to car depreciation?
There are a number of factors that will change how much your car is worth. And while some are fairly obvious, you might not have taken all of them into account when choosing which car to buy.
- Mileage: The more mileage your car has on the clock, the less your car is worth. The average UK annual mileage is around 10 – 12,000 miles per year, doing a lot more will mean your car depreciates faster.
- Previous owners: More owners will mean trusting a higher number of people and a greater chance of potential issues in the past.
- Warranty and service history: Is there a long warranty left? With some manufacturers offering 7 years of cover, this can help maintain a higher resale value. As will stamps and records from the main dealer showing you’ve kept to the recommended service history.
- Brand and model reliability: Are you buying a car that has a reputation for going wrong, from an unpopular brand? This will limit the number of potential buyers in the future, and lower the value based on demand.
- Brand and model desirability: Brands with good reputations for reliability and strong demand will usually depreciate at a lesser rate. Some cars are replaced with new designs every few years, so a recent, more current example will hold value better than the last examples of the ‘old’ design.
- Fuel economy: Smaller, more fuel-efficient cars will tend to depreciate less. They cost less to run, and appeal to a larger pool of buyers, keeping demand higher.
- Size and cost: Larger, more expensive luxury cars like SUVs will originally cost more to buy. Which means their value has further to fall. Especially if they cost more in fuel, parts, and maintenance. Lose 30% of the value of a £10,000 car and it drops £3,000. But for a £50,000 car, that’s £15,000 lost.
- Road tax: Smaller cars cost less to tax every year, which makes them more appealing to other buyers.
- Safety: Safety tests and ratings can have an effect on the demand, along with any widespread faults and manufacturer recalls. For individual cars, this also includes failed MOTs or known issues.
How can I reduce car depreciation?
There are many ways to reduce depreciation and ensure you get the best possible price when you decide to sell. While not all depreciation factors are within your control those that are can still have a big impact on the sale price.
Firstly, always try to keep the car clean during your time of ownership, the gradual build-up of grime and dirt can soon become a problem which can be reduced by regular cleaning and visits to the car wash.
The better a car looks when it’s time to sell means the more money you can ask for it and a clean car will attract more buyers.
Try and keep the car mechanically sound and regular services will always help with the value of a car. Those with a service history always attract a better price than those without because it shows the vehicle has been well cared for and maintained.
If depreciation is a concern to you, consider buying a vehicle that’s around five years old – by this age, it won’t lose too much more of its value. If you maintain the servicing and fastidiously take care of a car that’s already five or so years old when you buy it, you could even be in a position of selling it for the same or slightly higher price than you bought it when it comes to moving onto new wheels.
At the end of the day, car depreciation isn’t something you should let keep you up at night. It happens to all cars and keeping care of your wheels has more value than simple finance.