Car Depreciation: How Much Value Will Your New Car Lose?
Car depreciation is a vehicle’s drop in value over time. Depreciation varies by car model, make, upkeep and other factors, but new car depreciation can generally be as much as 20% (or even more) in the first year and reach around 40% after five years.
Depreciation matters, as it can influence whether you’re upside down in the car (that is, owing more than it’s worth). It’s a factor in the total cost of ownership for your vehicle — and if you sell, trade-in or total the car, it will affect how much you will get out of your vehicle.
In this article we’ll cover…
What is car depreciation?
Depreciation is the difference between what you paid for the car and what it’s worth later. While homes typically appreciate, rising in value over the years of ownership, cars tend to lose their value over time. There are no hard and fast rules, but car depreciation is usually 15% to 20% in the first year.
Car depreciation example
Say you buy a new car for the average price of $46,085. At the end of the first year, the car may be worth $38,896 after the average depreciation rate. That’s a drop of $7,189 or 15.6%.
Every car loses value over time — except for classic and collectible cars, which may be worth a lot more than when they were new. Depreciation is why used cars are usually cheaper than new cars. The used car price reflects the loss of value since the car rolled off the dealer’s lot for the first time. A used car will continue to depreciate, but usually not as fast as a new car. Car lease rates are based in part on the depreciation of the car during the term of the lease.
The loss in value matters if you total the car in an accident and your insurance company pays the current market value of the car. The amount may not be enough to satisfy the loan balance if you have one. If you trade in or sell the car, depreciation could mean the current value could be less than what you need to pay the balance of a loan. Depreciation is also part of the total cost of ownership, which also includes insurance, maintenance and repairs, licensing and fuel.
Car depreciation reasons
The vehicle depreciation rate varies for a number of reasons. It’s good to understand why cars lose value over time, so you can make smart decisions when you buy the car and during your ownership.
- Type. Pickups and SUVs are usually in high demand as used cars, so they retain a higher value than other vehicles; on the other hand, luxury sedans tend to depreciate faster. High-demand cars like Chevrolet Corvettes and Ford Mustangs also hold their value longer.
- Make/model. Some makes, like Toyota, have lower depreciation rates on many models. The Jeep Wrangler and Wrangler Unlimited also have some of the best depreciation rates. Meanwhile, several BMW models have depreciation rates that are significantly high — well over the typical 40% over five years.
- Age. As cars age, their value tends to drop as they become used cars.
- Mileage. The more miles on a car, the lower its value is likely to be due to the potential cost of repairs.
- Condition. A car with normal wear and tear will likely have a higher value than one that shows signs of abuse or neglect of maintenance.
- Reputation. Some makes and models have a reputation for a high cost of ownership, due to expensive maintenance and repairs — these types of cars tend to lose value faster.
How much do cars depreciate?
Cars lose the most value in the first year, and depreciation continues for about five years. A car can lose up to 20% of its value in the first year, and over the first five years fall to around 40% from the original price. That means it loses about 15% of the value each year after the first year.
Depreciation varies widely by make, model and the market demand for the vehicle. Here’s a look at the cars that depreciate the most and least over five years:
Top 5 lowest vehicle depreciation rates
|Rank||Model||Average five-year vehicle depreciation rate|
|2||Jeep Wrangler Unlimited||10.5%|
Top 5 highest vehicle depreciation rates
|Rank||Model||Average five-year vehicle depreciation rate|
|3||BMW 7 Series||61.5%|
Based on data from iSeeCars.com.
Steps to protect against car depreciation
Some car depreciation is a fact of life, but there are steps that you can take to reduce its impact:
- Reduce your mileage. If you keep the mileage on the car under the national average of about 14,000 miles per year, your car could have a higher value.
- Follow a regular maintenance schedule. Follow the manufacturer’s recommended schedule for fluid changes, brake checks and other typical tasks. Keep records to show potential buyers the car has been well taken care of, and address any recalls that affect your car.
- Purchase a GAP insurance policy. GAP insurance will pay the difference between the balance of the loan and the car’s value in the case of an accident where the car is declared a total loss. It will protect you against the depreciation on your vehicle or being underwater in the car. GAP insurance is required in many car leases.
- Keep it clean. Take care of the interior and exterior with regular washing and waxes and vacuum and wipe down the interior regularly. Fix any sign of rust or dents and dings in the paint.
- Stick with a valued brand name. Buy cars with a reputation for reliability and high resale value, like the ones in the lowest depreciation rate chart above.
- Choose color carefully. Wild or unattractive colors can reduce the resale value of your vehicle. Go with neutral colors like white, black or silver to help your car hold onto its value.
Frequently asked questions
How much value do cars lose each year?
Cars typically lose around 15% per year after the first year.
What is the average depreciation of a new car?
New cars depreciate on average about 40% in the first five years.
How much value does a car lose when you drive it off the lot?
Cars can depreciate as much as 20% or more in the first year of ownership. Because of depreciation, you could have an upside down car loan, which means that you owe more than it’s worth.