What is car depreciation?
Unlike real estate property which is an appreciating product, it is normal for a car to lose some of its value as it gets older and is used more. Car depreciation is the loss in value of a car over time. It is the single biggest factor that affects the running cost of a vehicle.
Did you know that new cars can lose around 20% of their value in the first year after it was bought, and will lose around 50% of their initial value in the first three years of ownership? In fact, cars lose value the moment they’re driven off the dealer forecourt!
What factors contribute to car depreciation?
Some common factors that contribute to car depreciation:
This is a big one to consider when buying a used car – the more mileage your car has on the clock, the less your car is worth. Typically, the value of the car will depreciate much slower after the first 5 years of the vehicle’s life (this does not apply to certain cars such as vintage and classic cars of course!).
Considering how quickly the value of a car depreciates in the first 5 years, it may be more cost-effective to buy a car that is 5+ years old as it has already lost a majority of its value so it won’t lose as much value in the next few years. Keep in mind that the older the car, there is always the risk of other running costs such as repair and maintenance.
Having said that, this wouldn’t apply to a 10-year-old car, for example, as even though it would have lost most of its value, it has almost reached the end of its life and could potentially cost more in repairs and other running costs (the average age of a UK car is 8.4 years as of 2020).
History of the car
The more owners a vehicle has, it’s likely the value of the car will be lower. In addition to this, whether the car has the manufacturer’s warranty still left and has all service stamps as per recommended service schedule will also have a big impact on the overall value of the car. If a vehicle has had an MOT fail in the past, that will also potentially affect the value of the car.
Safety & reliability
Cars that have known issues in terms of safety and reliability usually depreciate much more quicker than those with good customer satisfaction ratings. Cars with good safety NCAP ratings for example do not depreciate as much. Makes and models that have widespread issues and are known to fail MOT more often will depreciate quicker.
Condition of the car
Recent research by WhatCar found that towing, smoking in, or transporting young children and pets reduced a used car’s value by 15%! In the absence of regular cleaning or proper maintenance, the car’s overall condition can tarnish, thereby decreasing its value even further. Any damage to paintwork and bodywork, both interior and exterior, is also a contributing factor.
In some cases, old and out-of-date technology can make a car less desirable thus lowering the demand for it. For example, even features such as cruise control can mean a difference in value for an equivalent model without this feature.
Electric cars when compared to petrol and diesel cars tend to hold their value a bit better on average but can of course differ greatly based on the make, model and condition of the car.
The new 2030 law that will ban the sale of new petrol and diesel cars, will be an important factor in calculating the rate of depreciation of different types of cars on the market.
Generally speaking, smaller, more fuel-efficient cars depreciate less. The cost of running these vehicles is much lower, and they appeal to a broader audience, resulting in higher demand.
The tax burden on smaller cars is lower, making them more attractive to potential buyers.
How can I calculate the rate of depreciation for a car?
Depreciation is calculated using a relatively straightforward formula. Based on the purchase amount, it factors in the years of ownership and the typical depreciation rate per year, which is weighted towards the initial depreciation.
There are several online calculators that help determine the depreciation rate of a car such as The Money Calculator which bases its estimates on the first 3-year depreciation curve, how old the vehicle was at the time of purchase and annual mileage to calculate rates of depreciation at other points in time.
Some other helpful websites that can help determine the rate of depreciation of a car and also understand the valuation of a specific make and model:
- Omni Calculator
- Parkers Car Valuation
- Money Helper (using reg number)
Different countries and markets have different ways of calculating car depreciation. The method used will typically depend on the country in which the car is registered and the accounting standards that are required to be followed. Remember that the online calculators are a rough guide and the actual value can differentiate based on factors such as the condition of the car, the history of the car and market trends.
Using the following values as an example: a purchase price of £20,000, a current age of 2 years, a plan to own the car for 5 years, and a depreciation rate of 20%, you can calculate the current value of the car as follows:
Current value = £20,000 x (1 – 0.20) ^ 2 = £12,800
With this logic, the car is currently worth £12,800.
To calculate the future value of the car after 5 years of ownership, you can use the following formula:
Future value = £12,800 x (1 – 0.04) ^ 5 = £8,192
Here, we’ve calculated the annual depreciation rate as 20% divided by 5 years, which is 4% per year. Using this rate and the current value of £12,800, we can calculate that the car will be worth £8,192 after 5 years of ownership.
So, the car will depreciate from £20,000 to £12,800 in the first 2 years of ownership, and then to £8,192 after 5 years of ownership.
Note that the depreciation rate in this calculation is an estimate and can vary depending on various factors such as the condition of the car, the mileage, and market demand.
How to minimise your car’s depreciation rate?
Pay Attention to the Mileage
One way to limit depreciation is to keep the mileage under the average miles per annum. The more miles you have on your odometer, the more likely it will be that it will depreciate in value.
Make it a part of your routine to keep your car clean which will prevent the building up of grime and unpleasant odours inside the car. Keeping your car clean and tidy and in great condition will help limit depreciation. Avoid smoking or taking pets in the vehicle as the odour tends to linger around.
It’s good to give it a clean every few weeks (preferably by handwashing to prevent scratches) and waxing and polishing once a year can help prevent damage to the paintwork of the car.
Don’t put off repairs
In the event of damage or any repairs required, use the manufacturer’s recommended parts and repair it as soon as possible to avoid further problems.
Avoid Non-Standard Modifications
As exciting as an aftermarket body kit or a new set of aftermarket alloy wheels may sound, it can tend to narrow down the pool of potential buyers for your car in the future, making it harder to sell and most likely driving down its value. As funky as a lime green paint job may sound and look, it’s better to stick to popular colours to appeal to more buyers when you want to sell the car.
Maintain Your Car
A full-service history gives potential buyers peace of mind. Remember to keep all your car documents including service records and receipts. The recommendation is that drivers should service their car every 12 months or every 12,000 miles. However, you should check your owner’s handbook for the vehicle and follow the advice it gives on servicing. At ClickMechanic, we provide three levels of service – an interim, full or major service.
Don’t fail the MOT test
Well technically this may not entirely be up to you, but there are a number of checks and precautions you can take before the MOT test to increase the chances of passing the test! This blog post covers some simple checks you can do yourself.
Research Before Selling
If you’re looking to get the best price for your car, consider doing a bit of research to see what’s the best time to sell your car. For example, convertibles tend to be in higher demand during the summer months. Sometimes selling your car before the new model arrives in the showrooms can help preserve some of its value.
Buying the right car
If you’re planning to buy a used car soon the first step is to make sure you buy the right car. Keep in mind a few factors such as the number of previous owners – the fewer, the better!
Although older cars are cheaper, more often than not, a newer model will hold more value when it’s time to sell it off. It’s also important to do a Pre-Purchase Inspection by a professional to make sure you’re making the right investment. ClickMechanic can help with a Pre-Purchase Inspection, with three different levels of inspection.
What type of cars have a higher depreciation rate?
Market trends dictate most of the types of cars that are in high demand so it’s good to look out for this to understand what cars are not attractive to buyers and depreciate the most. As of 2022, data suggests that Mercedes-Benz S-Class, Audi A8 and Subaru Impreza are the top 3 cars with the highest depreciation rate in the UK.
When it comes to cars that depreciate the most globally, research found that the top 5 car brands were Chrysler, Audi, Seat, Škoda and Infiniti. This, of course, is an average finding of all cars in the US, Europe and Australia markets so each car makes and model will have a different depreciation rate.
What type of cars have a lower depreciation rate?
In general, market trends should be monitored to find out which manufacturers and models are in high demand and websites such as AutoExpress, WhatCar, and TopGear are some worthwhile websites to check for the UK market. There is a high demand for SUVs and 4x4s in the UK, and that will probably not change dramatically anytime soon.
In the current environment, consumers want the benefits of electric vehicles without experiencing range anxiety, so petrol-electric hybrid vehicles have low depreciation rates. This may however change in a few years with the introduction of the 2030 ban on the production of new petrol and diesel cars.
Recent research found that the top 5 car makers with the best residual value are Porsche (-64.4% maximum depreciation), Jeep (-84.4%), Mini (-85.5%), Land Rover (-86.3%) and Jaguar (-86.7%). This data looks at cars globally and takes into account all types of models, so naturally, the depreciation rate of each car make and model (and country) may differ.