Car depreciation – the ultimate guide
Car depreciation is a simple idea in theory. It’s all about your car’s market value. It’s the difference between what your car is worth when you bought it, and how much it’s worth now if you were to sell it. Depreciation is closely linked to both age and mileage.
It may seem simple and inevitable, but many car owners overlook the fact that understanding depreciation can save a lot of money when it comes to sell, as selling at the right time can be absolutely critical. Read on for depreciation enlightenment…
Every new car will lose some value as soon as it drives off the forecourt. A high mileage, badly-maintained vehicle will become less valuable than a low mileage, well-kept example. However there are many other less obvious ways that you can minimise the effects of car depreciation.
We’ve put together this guide to help you wrestle control over your car’s ongoing valuation and market value. For example, a car worth £12,000 can often be worth around £10,000 a year or two later if it’s looked after, but you need to take care of it.
But it’s not just about buying and selling. It’s also good to keep a check on the current value of your car for insurance purposes. In some cases, you may be paying a higher rate of cover than you need, and if you don’t keep your details up to date, you may find yourself getting a much smaller payout than you would expect if your car is written off.
Car depreciation explained:
- What Is Car Depreciation?
- How Fast Will My Car Depreciate?
- How Important Is Car Depreciation When Buying Or Selling A Car?
- How To Improve Your Cars Depreciation Rate
What Is Car Depreciation?
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 is 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 away from the factory production line and into a showroom. It’s brand new and pristine. So you’ll pay somewhere close to the manufacturer listed price for the pleasure of owning it.
But five years later it will have covered around 40,000 miles on average and in that time, normal wear and tear 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 either a classic car, or you intend to keep it until it becomes one.
Anything you buy becomes worth less once it has been used. 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 worth less to potential buyers.
The biggest drop in value will always tend to be on new cars. The majority of depreciation occurs over the first 8-10 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 Depreciation?
There are a number of factors which 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 under 10,000 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 from a main dealer showing you’ve kept to the recommended service history.
- Brand And Model Reliability: Are you buying a car which 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 more 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 demand, along with any widespread faults and manufacturer recalls. For individual cars, this also includes failed MOTs or known issues.
- Compliance: with ULEZ in London now in full force, cars that are not Euro 6 compliant have seen accelerating depreciation in recent times as they are less desirable for many people entering the capital.
How Fast Will My Car Depreciate?
You can get an idea of future depreciation with some fairly quick and simple research before buying your next car. Certain brands tend to be more affected, often due to their lingering reputation for poor reliability.
In the UK market, many of the brands which suffer the most depreciation tend to be French or Italian car manufacturers. Renault and Fiat among them.
The best and worst examples of car depreciation tend to appear in lists on every automotive and news websites towards the start and end of each year. That will give you some idea of which cars might be a good choice.
But you can find more specific information by using one of the car depreciation calculators available online. These use information from a variety of databases and online sales to track the values of a huge range of new and used cars.
You can choose to search by make, model, or number plate to get the current and future expected values for your current or next car.
What Are The Averages For Car Depreciation?
With so many factors contributing to the exact rate of car depreciation, there can be enormous variations within ranges of models from an individual manufacturer. So how do you know roughly what to expect?
The average car depreciation will hit hardest in the first year of ownership. Generally the drop will be around 15-35% in the first 12 months. And that will continue to rise up to 50% or more over three years.
- Year 1: 15-35% depreciation. 65-85% of original value.
- Year 3: 40-60% depreciation. 40-65% of original value.
- Year 5: 60-70% depreciation. 30-40% of original value.
- Year 8-10: 80% depreciation. 20% of original value.
By the end of the first decade, a car will have effectively bottomed out in terms of value and depreciation. From this point prices will tend to stay the same or even begin to rise slightly if a car is seen as an emerging classic.
If you estimated the typical lifespan of a car to be 20 years, the average depreciation every year would actually be a 15% drop every 12 months.
Car Depreciation Graphs and Tables
Fortunately to help guide you through your car buying and ownership cycle, a range of car graphs and tables exist online to give you an idea of your potential costs. They can help you see likely depreciation for your vehicle over time. Which leads us to…
Car Depreciation Calculators
These all work on similar principles to show roughly how depreciation affects individual makes and models of car. Many will also allow you to enter your numberplate for a more accurate valuation using available data from the DVLA to include mileage, MOT results etc.
The car depreciation formula is based on a quite simple calculation. It starts with the purchase amount, and then factors in the years of ownership and the typical rate of depreciation per year, weighted towards the initial depreciation from new.
So effectively price minus depreciation times by years owned.
But most car depreciation calculators then add additional data compiled from their own databases of recorded sales, or trade industry data from organisations such as CAP.
This allows them to adjust the results based on real transactions, trade sales, and market trends to give a more accurate picture of what your car or potential purchase is worth now – and what it might be worth in the future.
Finally, you can specify an individual car using the registration number to allow for DVLA information to be included in the calculation, based on mileage and MOT results, for example.
Ultimately, all car depreciation calculators and price guides are providing a guide figure which may vary depending on the age, condition and desirability of the vehicle itself.
For example, Parkers has been providing new and used car valuations since 1972, so their service gives data on makes, models, and registration numbers. It’s based on their sales data along with trade information.
Car Depreciation Tables:
Car running cost tables or depreciation tables work in a similar way to calculators by using average figures to show a guide to typical costs, including depreciation.
As a result, you’ll get a breakdown of the typical value on an annual basis or at the end of a time period you select. Many tables will also include the average depreciation on a per mile basis.
They also include the cost per mile of fuel, maintenance and other costs to give you a total expense for every mile you cover in your car. It’s useful as a way to compare the typical costs of various vehicles, although it may also get you to consider walking more!
Obviously car running costs and depreciation tables aren’t personalised beyond the make and model of cars selected, so you can’t see what happens if a car has recorded above or below the typical mileage, for example. Or if it’s poorly maintained.
How To Improve Your Car’s Depreciation Rate
Whatever car you’ve bought, it’s possible to slow the rate of depreciation and get the best possible resale value with some relatively simple steps. Looking after your vehicle and maintaining it properly will mean you lose less money when it’s time to sell. Additionally, it will improve your safety and fuel efficiency, saving you even more.
Key ways to minimise your car depreciation include:
- Keeping your mileage down if possible
- Keep it clean and looked after – check our guide to washing and waxing your car.
- Maintaining your car according to manufacturer recommendations, and keeping all service records and receipts.
- Using manufacturer recommended parts to repair any damage as soon as possible
- Avoid smoking or taking pets in your car.
- Avoid or remove modifications such as spoilers or aftermarket wheel arches
- Check and prevent MOT failures for simple faults, and look at any recorded issues. Get tips in our Ultimate MOT guide.
How Important Is Car Depreciation When Buying Or Selling A Car?
Depreciation is generally the second biggest cost of buying a car after fuel. If you choose badly on a new car, it can easily become the largest expense. While petrol prices vary over time, the typical cost is around £800 per year.
But when depreciation over the first 3 years of ownership can vary between 10-40% or more, you could lose thousands annually without even realising.
If you’re buying a new car, then depreciation is a major factor. The biggest drop in value comes in the first few years of vehicle ownership. And it starts from the moment you drive away from the dealer forecourt.
Car depreciation over the first 12 months from new will typically be between 30-40% of the initial value. But this can vary a lot, and can be as little as 10% if you choose wisely.
By the end of the first three years, with the average of around 30,000 on the clock, the typical car will have lost around 60% of the initial price.
There are still potential benefits to buying a new car. You don’t need to worry about previous owners, warranties, or MOTs. And some car buyers think that the initial depreciation is a price worth paying to always have the latest model under 12 months old.
Buying an 8-year-old car to avoid depreciation might end up costing you more in maintenance and running costs.
So the key is to understand which brands and models are the safest bets for low depreciation. And which cars you might want to avoid if you don’t want to be spending more than you want.
What Affects How Fast A Car Will Depreciate?
We listed many of the general factors for car depreciation above. But some factors are only apparent at a model or even specific trim level. For example, a widespread fault or manufacturer recall can have an effect on depreciation, even if the problem has been rectified correctly.
Other external factors can also have an impact on depreciation. The concern over diesel pollution and emissions scandals has led many to ask whether they should buy or sell a diesel car. The related concerns over anti-pollution taxes becoming more common in capital cities has changed demand for cars which minimise your commuting costs.
When you look at an individual car, then there are other factors to consider. Everything from the overall condition, to failed MOTs, known faults, or any modification and changes made to it can affect the car’s depreciate rate.
Depreciation can vary on details including whether you’ve picked a car in a popular or unusual colour. Shades such as black, grey and white are usually safe bets, but other choices can vary with current trends and fashion.
Picking the right trim level and options can also help. Investing in metallic paint, leather seats and other options can help to maintain the value of a luxury executive car, but won’t appeal to small, economy car buyers.
We recommend that you try not to limit your market by adding modifications like spoilers, wheel arches and expensive alloys.
How Does Depreciation Vary For Different Makes And Models?
The reason that average car depreciation is hard to calculate accurately is that the value of an individual make, model or trim level can vary by large amounts.
For example, the SEAT Mii and VW UP! are both identical under the hood. And yet the SEAT will only be worth around 36% of what you paid for it after 3 years, losing almost £6,000. The drop in value is only explained by the premium buyers are willing to pay for a Volkswagen badge.
What Cars Are Best For Depreciation And Depreciate The Least?
Overall market trends are worth watching to see which manufacturers and models maintain high demand. For example, SUV and 4×4 models are in demand in the UK, and that’s unlikely to radically change in the near future. And petrol-electric hybrids have strong residual values as car owners want the benefits of electric vehicles without range anxiety.
Combine that with a strong, desirable brand and it’s no surprise that some of the best performing cars for depreciation include models from Porsche, Range Rover, and Mercedes. On data alone, the likes of Ferrari and Bentley also make an appearance, but probably won’t be in the budget of the typical UK car buyer.
If you do have enough to spend on a Porsche 911 GT3 or Range Rover Sport, then you’d typically retain around 70% of the purchase price after 2-3 years. And a Porsche Cayenne, Macan or Panamera would keep be worth between 63-65% of what you’d paid.
For those with a lower slightly more realistic budget, then the best brands to minimise depreciation would include MINI, Audi and VW. For example, the luxury Audi SQ7 ticks both the brand and SUV boxes, and won various awards in 2018. Or you could try the sporty Audi RS3 quattro S tronic. For a different alternative, there’s also the Jaguar E-Pace 2.0 2WD.
From VW, the enduring strong brand and performance of the Golf range means it’s hard to pick a bad one. And something similar is true with the MINI.
Which Cars Are Worst For Depreciation And Depreciate The Most?
Overall market trends also indicate which cars and brands will tend to depreciate the most over time. The rise in popularity of SUVs, hatchbacks and smaller family hybrids has led to a drop in value for family-sized saloons.
French car makers all have examples of cars which perform badly for depreciation. For example, the Citroen C4 and Peugeot 308 hatchback are both competing against the VW Golf for new and second hand sales, and do poorly as a result. Meanwhile the Peugeot 308 family saloon has tried to take on the Audi A4 and BMW 3 series.
As a result, buying any of the trio would lose you around 75% of the value to depreciation over 3 years. The worst news is that you’d lose more than 60% at the end of the first 12 months alone. A new Citroen C4 1.2 Puretech costs £18,610 new, but would lose £11,260 by the end of the first year of ownership.
Other brands which always seem to struggle with depreciation are Fiat and Alfa Romeo. Some of that is due to an enduring perception of Italian reliability based on cars from decades ago. A mix of underperforming current cars and older, outdated designs in need of a revamp also contribute.
The Fiat Panda is a good car which loses almost 60% of the purchase price in 12 months due to a high level of competition, whereas the Fiat Punto hasn’t changed substantially since 2005.
Meanwhile, the modern Alfa Romeo range looks great. But they lose out in performance, comfort and depreciation. For example, the Mito loses 71.9% of the purchase price in 12 months (£11,555), as it competes against the Audi A1 and MINI. You’d lose £13,725 if you bought a new Alfa Romeo Giulietta. Because the rivals are the Audi A3 Sportback or BMW 1 Series, which will hold their value better.
Always check individual models from any brand. There are examples of cars which depreciate heavily from the likes of Skoda (the Rapid 1.4 TDI CR 90 SE L), Vauxhall (the Astra GTC 1.6 CDTi 16v ecoTEC Sri or Cascada 2.0 CDTi 170 Elite), and pure electric cars including the Nissan Leaf and well-reviewed Renault Zoe. The French electric car costs £29,020 brand new, but loses £21,770 over the first year.
Looking for more info and advice on depreciation as relates to buying or selling?
Try these handy guides that cover some of the most important factors affecting your car’s price, value and ongoing depreciation:
- Euro 6 Ultimate Guide
- How To Value Your Car – The Car Valuation Guide
- Ultimate guide to car value
- How To Use A Car Buying Site – What’s Your Car Really Worth?
- Should You Buy Or Sell A Diesel Car?
- Best Cars for MPG
- Best Used Cars Under £10,000
- How To Sell A Car – The Ultimate Guide
- PCP Car Finance – The Ultimate Guide