A car is a type of asset that depreciates. Understanding how car depreciation works can help you save money on your next car purchase.
What Is Car Depreciation?
If you plan to buy a car, you should calculate how much depreciation the car will undergo. The amount a car’s value decreases over time is called depreciation. Understanding how much a car will depreciate is important for a number of reasons.
Planning For Depreciation
You can decide on when and how to sell a car based on how much it’s depreciating. If you buy a new car for $30,000 and sell it after 5 years, the car may be worth only $15,000 by then. This means that if you owned the car for five years, your cost would be $15,000. On the other hand, if you decided to buy a used car for $30,000 after going through most of its depreciation, it may be worth $20,000 five years from then, costing you only $10,000 after five years.
The Rate of Depreciation in New Cars
As all cars depreciate most in their first year, new cars depreciate more than used cars. After leaving the dealership lot, cars depreciate by 10%, followed by another 10%-20% after one year. The value of a car will depreciate by up to 60% after five years if depreciation occurs at 15-25% per year for the first year. When people take out long-term loans, it can lead to them owing more than their cars are worth, which can be worrisome.
The Rate of Depreciation in Used Cars
A car just one year old is worth around 30% less than a car that’s five years old. The reason for this is the depreciation rate of new vehicles that we mentioned above. If you decide to buy a car that’s two or three years old, you’re going to save even more due to the further depreciation of that vehicle. You benefit both as a buyer and as a seller, since the vehicle has more value when sold.
The Factors Considered with Depreciation
While this one is fairly well known and self-explanatory, the amount of mileage you have on the vehicle directly impacts the value of that vehicle. The more mileage, the more depreciation as most vehicles don’t see the road past 400,000 kilometres. So if you and Jim next door both have the exact same Honda Civic except he drives his 10km per day and you drive yours 50km per day, your Civic will undoubtedly depreciate faster.
2. The Make and Model
Certain car brands and models tend to hold their value more than others. A study conducted by iSeeCars.com found that electrical vehicles depreciate much faster than gas-powered vehicles, and certain trucks, SUV’s and sports cars depreciated slower over a five-year period. Overall, Toyota and Jeep have the lowest rates of depreciation among all car brands while BMW has the highest rate of depreciation.
3. Newer Models With Significant Upgrades
When car manufacturers release a new model of vehicle, if the model has significant upgrades/improvements, the older versions of that same model will often depreciate. This can also work the other way though, so when a model is discontinued, the older models won’t depreciate as fast.
This factor should come as no surprise as the better condition the vehicle is in, the more it will hold its value. If your vehicle has a cracked windshield and dents along the driver’s side, this will cause a loss of value to the car.
Even though you may think at the time painting your car neon green and adding a high spoiler seems cool at the moment, this usually causes significant depreciation. No matter how cool you think the vehicle looks, generally, the more you customize it, the fewer people may be willing to buy it.