What is car depreciation?
Car depreciation is the difference between the value of the car when it is first purchased and its value when sold. As soon as you start to use your car, it begins to lose its original value.
Why do cars depreciate?
The reason cars depreciate is because of the wear and tear they experience over the course of their life on the road. You can compare it to any other type of expensive item you pay for. For example, you buy a new mobile phone for around £500, after a few years it will naturally pick up marks and scratches that devalue it. Plus, it is no longer the latest model on the market which means it is worth nowhere near what you originally paid.
How much does a car depreciate?
Your car will lose most of its value during the first year you drive it. How much it will depreciate during this period is heavily linked to the price of the car. This can be broken down into three sections:
- Wholesale price
This is also referred to as the factory price, as it is the price the dealer will have to pay to buy the car from the manufacturer.
- Recommended retail price
The manufacturer will suggest a price that the car should be sold at on the market to consumers.
This is the price you will pay for the car after the dealer’s mark-up has been included in the final cost.
How much the dealership will mark-up from the wholesale price to the final retail price depends on how much profit they want to make per unit. This could be anywhere between 5-10% of the original value.
So, once you put the key in the ignition and drive away, the car has devalued from the retail price back down to the wholesale price. Therefore, your car immediately depreciates by between 5-10%.
During the first year of ownership, this could drop further to around 15-25% lower than the original price tag. The more years that pass, the more the car will depreciate in value.
Some people prefer to buy a second-hand vehicle to avoid the initial steep drop in car depreciation. However, as with any car, there is no way to avoid the fall in value over the coming years. There are some cars which appreciate, but these are luxury collectibles with a very high price tag.
Which cars depreciate the quickest?
Not all car types depreciate at the same rate. The cars which deprecate at a quicker rate include:
- Brand-new vehicles
You may expect the latest cars to retain their value for longer, but that is not the case. The reason is because they have higher mark-ups added onto their wholesale price. This means as soon as you start to the drive the car, it depreciates more severely compared to standard vehicles
- Cars with low demand
As with an item in a commercial market, the higher the demand, the more likely it is to hold its value and retain its price. So, if you want to buy a vehicle that is not popular, its value will drop very quickly.
Which cars depreciate the slowest?
The cars which depreciate at a slower rate are:
- Fuel-efficient cars
Cars with high levels of fuel efficiency tend to hold their value for a longer period due to an increased interest in cost-effective cars. Electric cars are a common option for slow depreciation.
- Cheaper cars
Affordable vehicles will always be popular, so they hold their value for longer.
How quickly do used cars depreciate?
Some drivers avoid buying a brand-car to avoid the steep drop in its value. But after the first year, there is no way to avoid the ongoing depreciation of the vehicle.
The age of the car you buy will determine how quickly it starts to lose its value:
- Almost new
A car that is 1-2 years old will avoid the rapid depreciation seen in brand-new cars.
- 5 years old
Any car bought after this amount of time will not lose much more value than it already has. But bear in mind the older the car, the more you will have to pay on repairs and maintenance over time.
- 8 years old
The car should have depreciated as much as it can at this stage. However, you run more risk of dealing with a large repair bill that could cost as much, or more, than one year of depreciation on a newer car.
How to minimise the risk of car depreciation
You can reduce the risk of car depreciation by:
- Maintaining and servicing your car regularly
- Repairing any damage as soon as possible
- Keeping your mileage as low as possible
- Choosing nearly-new to reduce fast depreciation
- Researching your vehicle’s value before buying
- Staying away from unpopular colours
- Leasing your car instead
Why leasing helps with car depreciation
If you like driving a new car and do not want to deal with the hassle of car depreciation, consider leasing. You do not own the car, instead you rent it for a fixed length of time, and the depreciation is factored into your fixed monthly payments – even if you have a higher mileage.
Get the brand-new vehicle you want without worrying about depreciation when you lease a car with us. With 29 years’ experience, we are experts in what we do. So, if you have any more questions, contact our knowledgeable team for more information.