How does the value of your car depreciate over time?
Cars have always been the carriers of our fondest memories, which include those fun summer beach trips with your friends, that first feeling of getting behind a steering wheel, those goofy adventures in the wild with your family, and many more.
The land of America can rightly be termed as ‘CarNation’, with each American spending almost 51 minutes behind the wheel every day. That equates to a whopping total of almost 13 full days of driving every year. For avid car enthusiasts, this figure might be even higher than expected.
Unfortunately, every car has to face the dreaded word called ‘depreciation’. It is the term that is associated with the car losing its value as you continue driving it over time. Yes, almost no car enthusiast thinks highly about depreciation, but it is an inevitable fact that every experienced driver has to accept.
However, gaining proper knowledge of how your car loses value every year comes in handy, helping you to make smart decisions over time. Thus, a driver can make informed decisions on whether his car needs certain types of maintenance to retain its value, or if it ultimately needs to be sold to a car buying website. Here we dive deep into the topic of how fast cars depreciate over time and what are the ways to tackle it.
An overview of car depreciation
Generally, car depreciation is calculated as the difference between how much your car was worth when you first drove it out brand-new out of the showroom minus how much it is worth in the current situation. A car’s value drops over time owing to the constant wear and tear that it is subject to in everyday usage.
A car with more miles on the odometer will obviously lose its value faster down the road. To understand depreciation well, here is an example. Suppose you acquired a car for $20000 today and then decided to sell it three years later for a selling price of $12,000. That accounts for a loss of 40% of its value owing to car depreciation.
Reasons for car depreciation
A car typically loses about 9-11% of its value once you drive it off the parking lot of the showroom. Take into account that the sticker price of your brand new car is $30,000. This means that you are throwing $30,00 right out the window once you finalize the deal for your new car! Factors like these are well beyond the buyer’s control. Similarly, there are many other factors that end up putting a dent in your car’s value over time:
- Mileage: It serves as a no-brainer that the more you drive your car around, the faster it will lose its value on a daily basis. If you can keep your urge to drive on hold, your car will retain its value much better.
- Fuel Economy: Remember the AM Hummer? You probably won’t see any of these beasts on the road today, partly because of their poor fuel economy. Buyers are always willing to pay for a car that shells out more miles per gallon, hence those cars sell at a much better value.
- Consumer Trends: Just a few years ago, sedans were a popular buy among the masses and a fashionable sight on the streets as well. Fast forward to today, you can see that crossovers and SUVs have taken their place as the popular car type for consumers. With the increased demand for popular crossovers and SUVs today, these vehicles depreciate at a much slower rate than sedans, minivans, or trucks.
- Condition: Any sort of damage to the car’s exteriors or interiors will automatically cut a chunk off its selling value if you decide to sell it.
- Reputation: Brands that have excellent reliability build cars that retain their value better than any other car. On the other hand, a car that is known to break down occasionally and subsequently has a large number of recalls loses value at a much faster rate.
How quickly do cars depreciate?
Every experienced car buyer knows that new cars face the wrath of depreciation more than used cars. However, a common question asked by newbie drivers is how fast do new cars depreciate? Hopefully, the answer to that question is answered in the timeline below:
- One Minute: As mentioned earlier, a new car loses about 9-11% of its value even when the scent of its new paint feels fresh.
- One Year: Various car analysts have established that car depreciation hits the worst when the car hits just one year in its lifespan. After a year of ownership, a car loses about 20% of its value on average.
- Five Years: After the first year of ownership, the car’s value drops at a linear trajectory. Every car loses about 15-25% of its value every year until its lifespan reaches 5 years. Thus, based on calculations, a used car about 5 years old has already lost about 60% of its value.
What are the most and least depreciating cars in the market?
Most new cars lose their value at a perilous rate, but there are also some cars that retain a large chunk of their value. With demand for pickups and off-roading Jeep’s is always high in America, experts have found out that these cars depreciate the least within the first five years of ownership.
Similarly, cars of brands with exceptional reliability reputations like Toyota and Honda also retain their value better than other cars. Alternatively, luxury cars and electric vehicles are the worst hit by depreciation in the same time frame.
Buying cars on either side of the depreciation spectrum has its share of pros and cons. Cars with low depreciation rate acquire a great resale value but can be equally expensive to purchase. Likewise, you can get a great cheap deal on a luxury BMW or Merc sedan over 5 years old, but be prepared to shell out a lot of bucks in repair.
How to reduce the impact of car depreciation?
- Keep an eye on the odometer
As per the data from the United States Department of Transportation Federal Highway Administration, the average American drives 13,500 miles per year. This translates to more than 1,000 miles driven per month. There are certain tasks Americans can carry at their own end, like completing all their errands in one trip or carpooling to work every day. All those extra miles that you save up adds to the resale value of your car.
- Follow a proper maintenance schedule
All those regular oil changes, tire rotations, and other forms of maintenance significantly conserve the value of your car. Following a regular maintenance schedule keeps your car in prime condition and also enhances its safety performance quotient. Almost every buyer is willing to take out a fat paycheck for a well, maintained used car, so don’t ever miss out on any service visits.
- Buy reliable and lightly used cars
For car buyers, the best option is to buy a car that has been gently used and also has a reliable background. As we know, new cars lose the majority of their value within the first year itself. So it is best to let someone else bear the brunt of a new car’s rapid depreciation and then you step in to buy the same car after some years of usage. With proper maintenance and care, you get a reliable and smooth-functioning car that will run better than most new cars.