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Car Depreciation: How Much Value Will Your New Car Lose?
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A drop in value is called depreciation. Car depreciation is when a car loses value, and new cars can lose up to 20% of their value within the first year; many lose 50% by their third year. Different makes and models depreciate at different rates, but it affects all car owners. It happens for reasons such as age, mileage, market forces and wear and tear. Here’s more on why it happens, when it matters and how you stave it off.
- What ‘depreciate’ means
- Why car depreciation happens
- When car depreciation matters
- When car depreciation happens
- How to stave off car depreciation
What ‘depreciate’ means
Depreciate means to lose value. Most cars, unlike houses, aren’t meant to be appreciating assets. That’s why a used car is generally less expensive than a new one. A part of a car’s life span has been used up by the time the second owner buys it. Ergo, it makes sense that the second owner would pay less — they are getting less. The value of that use is the depreciation.
For example, imagine a Toyota has an average lifetime of 300,000 miles. Its first owner paid $30,000. If the second owner bought the same car 10 years later when it had 100,000 miles on it, the car has less life left. The second owner isn’t buying the car’s entire lifetime, they are only buying 200,000 miles of it, so they paid $10,000. The depreciation from the first owner to the second was $20,000 or about 66% over 10 years.
Why car depreciation happens
Car depreciation can happen at different rates, for different reasons. Here are the main reasons car depreciation happens.
Age and miles. When you buy a car new, you’re buying the entire life span of the car. As you put miles on it and as it gets older, its life span is being used up. The older it is, the more miles it has, the sooner it will need repairs, the greater depreciation it has.
Wear and tear. If you’re in a car with holes in the seats, scratches in the dash and the poor vehicle squeaks over every bump, it’s got a lot of wear and tear. Besides poor aesthetics, wear and tear may mean there is mechanical damage. Buyers won’t pay as much for a damaged, worn vehicle, therefore it has higher depreciation.
Perception of dependability. All cars aren’t equal. Some vehicle brands and models have higher dependability ratings than others. Vehicles that have a reputation for lasting a long time and/or being inexpensive to fix will have less depreciation. If you’re looking at two vehicles with 100,000 miles on them, you’d probably choose the one known for lasting another 200,000 miles, rather than the one that might last another 50,000.
Gas prices and mileage. Americans tend to like bigger vehicles, such as SUVs, crossovers and trucks. But if gas prices shoot up and the used SUV you’re trying to sell gets 15 MPG on a good day, don’t expect top dollar. The car depreciation would be higher due to gas prices.
Supply and demand. If you’re trying to sell a 1995 sedan and there are 20 other older sedans in the same area that have been for sale for a month, then the supply outpaces demand — you might get a lower price for it and thus have higher depreciation.
When car depreciation matters
If you plan to keep a car for 10 years, car depreciation probably won’t matter a whole lot to you — you would buy the average lifetime of the car and keep it for its lifetime.
But if you plan to sell your new car in about a year, car depreciation might matter a lot. For example, we found a BMW 7 Series aging poorly — the 1-year-old BMW 740i with 16,000 miles is for sale for about $46,000, when the starting MSRP for a new one is $86,450. That’s more than a $40,000 loss in one year. Of course, this particular car has more miles than the average 13,476 annual miles logged by U.S. drivers. If you’re underwater on your car — it’s worth less than what you owe — it could be tricky to sell it, but there are ways to get out of an upside down car loan. A solid down payment and landing the best deal possible on your car and car loan are the best ways to prevent that situation.
When car depreciation happens
The clock starts when the first person buys the car for the first time. The lion’s share of car depreciation happens in the first several years. The largest chunk of that happens in the first year before depreciation starts to even out.
Why does new car depreciation happen so fast in the first year
There are a couple reasons new cars lose value so quickly in the first 12 months that they’re owned and it all has to do with the fact that they were new. If you’d like to find out how much your car has depreciated, you could use a car depreciation calculator or look up your specific car’s current value on NADAguides or Kelley Blue Book.
Inflated new car prices. Most new cars depreciate like a rock in their first year. When you buy a new car, you’re not just paying for the car, you’re also helping to pay for the dealer’s overhead — the building, lights, employees. It will almost always be more expensive to buy from a dealer than from a private individual and the only place you can get a new car is the dealer.
Change of status. A car is only new once. There is the old adage that a new car loses a ton of value as soon as you drive it off the lot. That’s because in some states, the car is officially yours only after you sign the paperwork and then drive it off the dealer’s lot. As soon as you do that, the car is considered used and typically can’t be sold as “new” again. And even if it only has a few thousand miles, people may not be willing to buy a used car for the same price as a new car. That’s why it’s almost always cheaper to buy used.
What about car appreciation?
Appreciation is the opposite of depreciation; it’s when the car gains value. And very few cars will gain value. Cars that do are mostly old, luxury sports cars and rare classic cars that are restored, sold and kept as collectibles.
How to stave off car depreciation
As no one’s figured out how to stop time yet, car depreciation will happen on almost every car, no matter what you do. But here are some steps you can take so that you’re not hit with a huge amount of it.
Buy used. Because cars depreciate the most in the first few years of ownership, if you buy a used car, you’ve missed out on a huge financial loss. Cars may have a 50% price drop by the time they’re only three years old. But a lot of cars have a much longer life span. If a car’s life span is 10 years and you buy a car when it’s just 3, you bought seven years’ worth of transportation for the price of only five years. If you’re in the used car market, here are the eight best used cars to buy.
Get a car known for reliability. Some brands, such as Toyota and Lexus, are known for lasting a long time. Yes, you may have to pay more for the reliable car when you buy it, but anyone else who buys it from you down the line may also be more enthusiastic about buying a reliable brand.
Limit the miles. Put as few miles on the car as is practical. Limiting mileage is a huge way you can limit depreciation. Miles can affect a car’s value even more than its age, so try carpooling in someone else’s car and don’t take too many extra-long drives on Sunday. Here’s how many miles a used car should have.
Do regular maintenance. Just like you should brush your teeth and shower, your car needs oil changes and cleaning.
Limit the wear and tear. General good upkeep of the car, such as preventing or treating any stains or scratches, can make a world of a difference. And driving habits matter, too. If you drive like a bull — accelerate quickly and brake on a dime — you’ll wear your engine and your brakes prematurely, making your car depreciation go up. You can read this if you’re wondering whether you should repair or replace your vehicle.
The bottom line
Car depreciation is when the car loses value over time. It happens to almost every vehicle in the world largely due to age, miles, wear and tear. Most of the car depreciation happens in the first few years the car is owned. Buying a used, reliable car, doing regular maintenance on it and limiting the miles you drive it are some of the best ways to avoid the worst of car depreciation.