Car depreciation is a part of vehicle ownership. The instant you purchase a vehicle and drive it on the road, it begins to depreciate. This might sound a bit discouraging, especially if you consider selling the car in the future. However, once understood, car depreciation can help inform our decision-making process over our new car and used car purchases. It can also predict model-specific resale values. That’s why understanding the different factors involved in depreciation can help you to buy smart and sell smart.
If you’re looking to upgrade your first car or sell an old vehicle, you will want to understand how much you can sell it for. While there is no doubt that your car has already lost its value, we’re going to explore ways to help reduce your car’s depreciation, as well as the best time to sell it and for the best price.
What is Car Depreciation?
Car depreciation refers to the difference between the purchase price of a vehicle and its eventual resale value - unless the model is considered to have collector value (e.g. classic cars), the resale value of your new car or used car is expected to decline over time.
Vehicles are expected to lose more value in their first year of ownership than in any other year. This is for many reasons, one of which comes down to the word ‘new’. Once you drive it off the forecourt, the car is no longer new - with newer models coming out all the time, desirability (and therefore value) is affected.
How Quickly Does Your Car Lose Value?
A car loses its value as soon as it is driven off the dealer’s parking lot. That’s why it’s important to understand car depreciation prior to buying and selling a car. In fact, developing an understanding of how quickly your car loses value over time can help to filter your decision-making process.
Here is how you can expect new $35,000 vehicles to depreciate (from brand new to the five-years-old mark):
- Day one (the day the car is bought)
Expected deprecation: 10% - 11%
Car value (initial value: $35,000): $31,100
- End of YEAR ONE
Expected deprecation: 25%
Car value (initial value: $35,000): $26,200
- End of YEAR THREE
Expected deprecation: 46%
Car value (initial value: $35,000): $18,800
- End of YEAR FIVE
Expected deprecation: 63% - 64%
Car value (initial value: $35,000): $12, 800
Cars depreciate by 50% somewhere between turning three years old and becoming a used car that’s entered the much cheaper four-year-old category. This is why three years marks a significant point in brand new car ownership.
For these reasons, we must begin to think of depreciation as the largest single expense with regards to owning a new vehicle (more so than other average lifetime ownership expenditures such as insurance, regular maintenance, and gas).
What Causes a Car to Depreciate?
Depreciation in both new cars and used cars is caused by multiple factors, some of which may be brand or model specific and some of which may broadly relate to all vehicles. For example, luxury models lose value often due to reduced popularity over time, whereas the resale values of all makes and models are typically affected by issues related to age and condition. On the other hand, a cheap commuter car could lose its value much faster depending on the distance traveled and the type of roads it’s driven on.
If you are planning to sell your used car at the two to three-year mark, a developed understanding of what causes a drop in value over time can help you to sell at the most competitive used car asking prices.
Causes of depreciation (for both new car models and used cars) include:
- The kilometres on the dial
Most of us drive an average distance of approximately 16,000 kilometres per year. When you come to sell your used car, buyers will note the age of the vehicle and calculate whether you have stayed within 16,000 km per year. Overshooting the annual average by a significant amount suggests to buyers that your vehicle will require imminent maintenance, affecting the sale price.
- Reputation & reliability
Some vehicle brands are well-known for their reliability, whereas others may be known for frequent maintenance issues. A poor reputation for reliability will have an expected knock-on effect in value - if your model has a poor overall reputation for reliability, buyers will likely haggle to help absorb any short-term maintenance costs.
- Number of previous owners
Used cars with multiple previous owners typically experience greater rates of depreciation. This is for several reasons.
First, there could be suspicions or doubts over why so many people would want to part with the vehicle. Next, buyers may be dubious because multiple ownership suggests the used car has been driven and maintained to different standards over its lifetime, meaning maintenance issues could soon follow.
- Overall condition
Cosmetic issues such as poorly maintained bodywork and worn looking interiors will drive down the resale value of your used car. Mechanical issues will also have a significant impact on depreciation.
How to Calculate Depreciation
A car depreciation calculator can be used to gauge the resale value of your exact model. Factors such as the initial purchase value, how long you have owned the car, and the known depreciation per year (by make and model) are factored in.
Check out this car ownership costs calculator for a better idea of how cars depreciate and the costs of owning your vehicle over time.
If you would like to sell your car, you may also wish to consult a depreciation calculator for car owners: click here (however, the values are in English Pounds - feel free to use this simple currency converter).
Ways to Reduce Your Car's Rate of Depreciation
Reducing your car’s rate of depreciation can be broken down into two categories. First, we will consider how you can plan for a reduced rate of depreciation at the buying stage. Next, we’ll cover how you can affect the rate of depreciation once you own the vehicle.
At the buying stage:
- Buy 3 - 4-year-old models (original owners absorb much of the depreciation on car values in the first 3 - 4 years).
- Where possible, stick to automatic transmissions rather than opting for less preferred manual transmissions.
- Purchase popular models. Features should only include sought after extras like air-con, leather seats, and a sunroof (avoid modifications that may not be to everyone’s tastes).
- Purchase popular colours (red, white, black, and silver cars may prove easier to sell than orange or purple cars, for example).
Once you own the vehicle:
- Keep the kilometres as low as possible. Buyer expectations will focus on an average of 16,000 kilometres per year (above this average, cars lose value).
- Regular maintenance is essential. This includes staying on top of interior and exterior cosmetic issues, ensuring your car undergoes all scheduled oil changes and paying for mechanical checks and fixes.
Finally, you could remove the issue of depreciation almost entirely by planning to own the car for 5+ years. At this age, your vehicle will not be expected to recoup a significant value.
Conclusion - Best Time to Sell
Taking all of the above into account, the best time to sell your car may appear to be ‘as soon as possible’. But that would leave you in the situation of only ever owning a car for very short periods, which isn’t practical or cost-effective.
Instead, choose a popular colour with sought after extras such as air-con, keep the kilometres as low as you can, and maintain the car inside and out. This should result in a fair resale price any time you choose to sell.