Why Do Cars Depreciate So Quickly? and Why So Fast After Driven?
Are you thinking about investing in a new car? If you are, then you need to shift your focus from how good a car looks and how well it engine runs, to how much value it will hold over the next few years.
Why is this?
Well, the value of a car falls every year, and with the staggering rates of depreciation your investment can cost next to nothing in just 5 years. I know this because I’ve learned the hard way.
Why do cars depreciate so quickly?
We’ll answer this question below along with all of your burning car depreciation questions. So if you’re looking for facts on which cars make the best investment as well as tips on how to maintain the value of your car, keep reading.
The Ultimate Guide to Car Depreciation
What Is Car Depreciation And Why Do Cars Depreciate So Quickly?
Depreciation is simply the reduction in your car’s value over a period of time i.e. the difference between the price you bought it at and the price you will sell it at.
The rate of depreciation of new cars is usually between 15-25% in the first year, and up to 60% over five years.
Depreciation occurs due to wear and tear. Think of it like this; would you spend $25,000 on a 6-year old car that needs to be re-upholstered when you can spend that same amount of money on a brand new model?
No you wouldn’t; the value of the used car has fallen and it is not worth its original price.
Car’s can also depreciate because of fall in demand. If there is limited market for your car, then it cannot be worth the amount you originally paid for it.
How Soon Does Your Car Start Depreciating?
Here’s something shocking.
Your car loses the most value in its first year! In fact, depreciation is at its most extreme the very first minute you buy your brand new car.
How is this? Shouldn’t depreciation increase as your car get’s worse, not when your car is still functioning at optimum levels?
Well, the answer lies in the price of your car. There are three prices to be aware of:
- Wholesale price: the price your dealer pays for the car when they buy it from the manufacturer. Also referred to as the factory invoice price.
- Manufacturer’s Suggested Retail Price (MSRP): the price the car manufacturer thinks the car should sell for.
- Retail price: the price you pay for the car when you buy it from your dealer.
Because car dealer’s need to make money, they put a huge markup (5% to 10+%) on the car. Therefore, the retail price is much higher than the wholesale price.
This means that the moment you drive your new car off the dealer’s lot, the value of your car drops down to the wholesale price.
When you add in the taxes and fees that you paid to buy your car, the value of your car depreciates by an average of 10% in the very first minute of ownership!
This is why many people choose to buy used cars that are in good condition, so that they do not have to shoulder the heavy burden of depreciation that is experienced with a new car purchase.
How Much Does A Car Depreciate Per Year?
As we mentioned earlier, a new car will depreciate by 10% the moment you drive it off the dealer’s lot.
Additionally, the car will depreciate by a further 10% in its first year, however, it should be noted that this depreciation could be more extreme depending on the model of the car (more on that below.)
After the first year, a car will depreciate by 15-25% per year, and after five years your car will be worth 37% of its retail price according to Edmunds.
So if you buy a used car, you will avoid the initial shock of depreciation, but you will still have to deal with your car losing value on a yearly basis.
Remember to take depreciation into account when buying a used car, so that you can save on money by negotiating a lower price.
What Cars Depreciate The Most?
There are two types of cars that depreciate the fastest:
- Luxury cars e.g. Cadillac, Mercedes, Maserati, Jaguar. Luxury cars have high markups, and while you might be paying $80,000 retail, the wholesale price might be $65,000. This leads to steep depreciation right after you buy the car.
- Cars that are in low demand. If you buy a car that nobody else wants, then there is very little monetary value in it. This type of car is challenging to sell, and if you do find a buyer they have the upper hand when it comes to price.
Here are 5 car models that lose value and some great alternatives.
What Cars Depreciate The Least?
On the other hand, you have cars that depreciate at a lower rate (these are always excellent choices to invest in.)
The IntelliChoice Best Overall Value of the Year (BOVY) awards are given to vehicles that have the lowest cost of ownership and operation in the first five years, and which retain excellent overall value (low depreciation).
The 2016 winners included compact cars, sporty cars, and passengers cars to name a few.
Similar awards held by Kelley Blue Book, saw trucks, Toyota models, and compact SUVs maintaining the best resale value.
What Will My Car Be Worth In 3 Years?
The majority of cars will lose between 50 to 60% of their original value in their first 3 years. This rate will depend on factors that we will discuss below.
To calculate how much your car will be worth in 3 years, use this CAR DEPRECIATION CALCULATOR:
7 Factors That Influence A Car’s Depreciation Rate
There are several factors that will influence a car’s depreciation rate. These include:
- Cost of ownership: It takes a lot of money to maintain a car e.g. fuel, insurance, service, repairs. The higher the cost of ownership, the higher the depreciation. Large cars that use a lot of fuel, have high insurance premiums, expensive parts, and high maintenance costs will depreciate faster than smaller cars that are cheaper to maintain.
- Quality of car: A high-quality car with great reviews will have lower depreciation than an unreliable car with negative reviews. In this day and age where car reviews and surveys are found on the internet, it is important to do your research before you make a purchase.
- Price: As we discussed above, expensive luxury cars depreciate the most and the fastest. As you can imagine, there is an exception for classic cars that are considered collectibles.
- Condition of car: A car that has damage to its interior or exterior will have a higher depreciation.
- Mileage: Average car mileage is 10,000 miles per year. The more miles your car has logged, the faster it will depreciate.
- Warranty length: The longer the warranty, the better it is for a car’s resale value.
- Demand: Cars that are high in demand have a lower rate of depreciation. Alternatively, if your car has been replaced by several newer models, then depreciation will be higher.
There are many costs associated to car ownership that you might be unaware of. These include taxes, fees, depreciation, financing (loan interest), fuel costs, insurance premiums, repairs and maintenance.
To ensure that you are not caught unaware when you go car shopping, use the True Cost to Own pricing system from Edmund to calculate the cost you will need to pay over the next five years.
How To Minimize Car Depreciation
Here are some excellent tips on how to minimize your car’s depreciation:
- Buy an in-demand car that has a low cost of ownership, or buy a used car
- Use the depreciation calculator to narrow down car’s which hold a high value after 5 years
- Keep the mileage as low as possible
- Look after your car- take it for servicing, repair all damage, and keep it clean
- Negotiate for a lower price
- Do not add modifications like wide wheels and spoilers which will not appeal to many
- Stick to neutral/sought-after colors
As you can see, depreciation is inevitable but it doesn’t have to be damaging. It’s important for you to carefully choose which car you are going to buy, taking into consideration its value at the end of 5 years.
Which tip did you find the most helpful? Share in the comment section below.
And don’t forget to share this article with all your friends and family who are in the process of car shopping.
- Always calculate the depreciation of a car before you buy it
- Make sure your car purchase will hold good value over the next 5 years
- Take steps to lower the depreciation rate of your car