How Car Depreciation Affects Your Vehicle’s Value

Written by Jordan BlansitUpdated: 20th Aug 2022
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Have you ever heard the expression, “New cars lose value the moment you drive off the lot?” Well, as it turns out, it’s true.

Thanks to car depreciation, new vehicles lose around 10% of their value as soon as you take the keys. By the end of the first year, they may shed 20% of their value or more.

Unfortunately, there’s not a lot you can do about depreciation, as it often has to do with market forces beyond your control. However, knowing how depreciation affects your vehicle’s value can help you make a smarter decision about buying, maintaining, and selling vehicles.

What Is Car Depreciation?

Depreciation is the process of your vehicle’s value dropping as it ages and collects miles, dents, and mechanical wear.

Unfortunately, depreciation starts the second you drive off the lot. By the end of five years, your vehicle will be worth about half its original price, on average. After that, value loss tapers off, finally “capping” at around 10-15 years.

While all vehicles experience depreciation, not all vehicles depreciate at the same rate. Depending on the make and model, a car may hold its value or plunge dramatically in just a few years. Market influences and vehicle trends can also affect depreciation rates.

For instance, when manufacturers experience supply chain issues, the value of used cars often soars as quality vehicles become a scarcer commodity. But when gas prices spike, vehicles may lose value faster – especially large gas guzzlers like trucks and SUVs.

What Causes Car Depreciation?

Several factors can contribute to a vehicle’s depreciation rate. We’ll break these into two groups: market forces and individual contributions.

Market Forces Contribution to Depreciation

  • Supply and demand. When demand outpaces supply – for instance, during a global shortage – cars depreciate slower or even increase in price. Additionally, vehicles that hold their value best generally have a strong demand when they hit the market.
  • Current auction prices. Cars, like other goods, are only worth what consumers are willing to pay. Often times, auction transaction prices help establish the trade-in value for vehicles, which factors into the depreciation rate.
  • Reputation. Cars built to last will depreciate slower more than models with a reputation for constant recalls or mechanical problems. Makes and models that consumers perceive as more reliable or valuable tend to sell for more secondhand. For instance, some Subaru models are known for “holding their value” after they leave the lot.
  • Consumer preferences. As new technologies and sentiments impact the market, consumer’ taste in vehicles tends to change. Generally, the most popular models hold their value better than others.

Individual Contributions to Depreciation

  • Location. In areas that have warmer weather or less salt in the air, vehicles tend to experience less oxidation or weather-related damage.
  • Fuel economy. Gas guzzlers tend to lose value faster than other models. While the value of the car itself isn’t like to increase, you can bet your sweet knickers that gas prices will.
  • Age. Even in perfect condition, older vehicles generally come with lower price tags.
  • Mileage. The more miles your engine has, the less your vehicle is worth, regardless of age. But older vehicles with fewer miles may be worth more in a secondhand sale.
  • Condition. Engine wear and tear, cosmetic damage, and even replacement parts and aftermarket upgrades can all influence your vehicle’s depreciation.
  • Ownership history. Vehicles tend to hold value better when they’ve had fewer owners. The more times a vehicle changes hands, the more skeptical a buyer will be when it’s time to sign the title.

How Quickly Do Cars Depreciate in Value?

Exact depreciation rates vary greatly by make and model. But as a rule, new vehicles depreciate much faster than older cars do. Generally speaking, a vehicle off the lot loses1,2:

  • 9-11% of its value the minute you take the keys
  • 20-30% of its value in the first 12 months of ownership
  • 15-25% of its value every year until the fifth year

After the fifth year, depreciation slopes off to around 10% per year. But once a car reaches around 10-15 years old, depreciation more or less stops.

What Cars Depreciate the Most?

Trucks, SUVs, and sports cars tend to hold more of their value during the first five years of ownership. Meanwhile, luxury sedans and electric vehicles  (EVs) often depreciate faster than other makes and models.

Vehicle brand also matters. For instance, Toyota, Honda, and Subaru often get high markets for holding their value. On the other hand, high-end brands like BMW, Audi, and Volvo may depreciate faster than the competition.

How to Reduce Your Car’s Depreciation: Tips and Tricks

Unfortunately, depreciation is an inevitable component of vehicle ownership due to market forces out of consumer control. These forces set a fixed value range for your vehicle that you’ll be hard-pressed to exceed with an individual buyer, let alone a dealership. (If you research your vehicle’s price and receive an estimate of, say, $10,000-$20,000, that’s a fixed value range.)

That said, you can slow the depreciation of your individual vehicle to get the most out of it when it’s time to sell. 45

The primary way to keep your vehicle in good shape is to complete scheduled maintenance and avoid dents, dings, and accidents. Additionally, it’s generally a good idea to keep your mileage as low as possible.

Regular car washes, interior cleanings, and waxes can also help keep your car spic-and-span. Storing your vehicle in a shaded area away from trees and direct sunlight can minimize paint oxidation, weather damage, and damage from falling debris.

You may also want to avoid aftermarket add-ons like noisy mufflers, rims, heavy window tinting, lifts, and subwoofers. While they’re fun and flashy, customizations shrink the pool of prospective buyers. Aside from concerns about legality or looks, aftermarket mechanical work introduces the possibility of shoddy mechanical work.

Of course, you can also try to reduce depreciation from the start by buying used.

Gently used models known for their reliability can get you from Point A to Point B just as well. And because new cars lose their value faster, buying used means you’ll lose less value over time. While that’s truer for vehicles in the 4- to 5-year-old range, even last year’s model can save you a chunk of change.

Does Depreciation Make Used Cars a Better Value?

That depends on you and how long you plan to keep your car. If you replace your vehicle every few years, then buying used makes more sense, as you’ll pay less for your cars over time. You’ll also be able to sell your vehicles for a greater percentage of your original purchase price.

But if you plan to hold your car for a long time, buying new matters isn’t as important. While you may still pay a little more in the long run, you’ll have the peace of mind that comes with buying a factory-new model right off the lot.

How Much Does a Car Depreciate in Value After You Drive It Off the Lot?

On average, vehicles lose 10% the first day you drive it off the lot. For a vehicle worth $45,000, that’s $4,500 right out the window.

Does Depreciation Matter If You Keep Your Car?

If you plan to keep your vehicle for 10-15 years, depreciation matters less for resale value. Still, you have to contend with the fact that you’re paying new car prices when you could save 20-30% just by buying the previous year’s model.

Bottom Line: Understanding Car Depreciation

Buying a vehicle is a big decision that can greatly impact your life (and your wallet). While you can’t quite replicate that “new car” smell with a used model, it’s important to consider the impacts of depreciation before you buy.

References

  1. https://www.yahoo.com/video/best-worst-cars-depreciation-171403799.html
  2. https://forums.edmunds.com/discussion/26023/editorial/x/depreciation-infographic-how-fast-does-my-new-car-lose-value
  3. https://www.iseecars.com/cars-that-hold-their-value-study
  4. https://www.statefarm.com/simple-insights/auto-and-vehicles/6-hacks-to-minimize-car-depreciation
  5. https://www.kbb.com/car-advice/how-to-beat-car-depreciation/
Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.