What is depreciation on a car?
Car depreciation is a term you may have heard if you’re looking to buy a new car (or even a used car that isn’t that old). But what exactly is it and how will you be affected?
In this article, we’ve explained what car depreciation is and how much a car’s value goes down each year, what contributes to it, whether it impacts a car finance agreement, and how to minimise the rate of depreciation on your vehicle.
What is car depreciation?
In simple terms, depreciation on a car refers to the difference in value between the amount you purchase a vehicle for and what you receive when you sell it or part-exchange. Because a vehicle typically loses the most value within the first few years of ownership, new car depreciation is generally far more significant than if you buy a used car.
How much does a car depreciate per year?
Within the first year of leaving the garage, the average depreciation rate of a car is typically 10-30%. This figure is quite broad, because there are a number of contributing factors to consider, such as make and model, mileage, and running costs.
New car depreciation often continues for the next couple of years, and within three years your vehicle will likely have lost around 50-60% of its value. After three years, your car will start to depreciate at a slower rate, before eventually stopping after 8-10 years. Knowing how to calculate depreciation of a car gives you an advantage when weighing up the value of choosing between new and used car finance.
What affects a car’s depreciation rate?
A car’s value can drop at any point in its lifespan, for a variety of reasons. However, we’ve outlined the most common depreciation factors you can expect to experience when purchasing a new car.
Age can affect the overall value of your vehicle, especially with the release of newer models with upgraded features. It’s worth noting that some cars depreciate quicker with age than others.
As your car accumulates more miles, it will lose value. This is because the more miles on the clock, the shorter the remaining lifespan of the vehicle (before needing significant repairs or regular upkeep).
Make and model
Some car makes and model are simply more desirable than others, which can contribute to the rate at which a vehicle depreciates.
Additionally, because of their long-term desirability and the shift away from traditional engines, early data shows electric car depreciation is typically lower than equivalent petrol and diesel.
Internal or external damage to your car will inevitably reduce its overall value, with scuffs, scratches, and dents making it a less desirable vehicle for future owners.
Fuel economy plays a part in determining car deprecation, with those that offer more miles to the gallon likelier to retain value thanks to the long-term savings on petrol/diesel. Additionally, vehicles that require more expensive or scarce parts for repair often depreciate in value quicker than those with parts more readily available.
Does depreciation affect car finance?
When you take out PCP finance on a vehicle, your monthly payments will be calculated to cover the overall depreciation on your car for the duration of the term. This means you’ll only pay the value that the car has lost while registered to you, and won’t have to worry about selling the car on (that is, if you don’t intend to pay the balloon settlement at the end of the loan period).
However, this doesn’t mean you can disregard the end value when choosing a car. In fact, because PCP finance only requires you to cover the depreciation, cars that better-retain their value may result in lower monthly payments.
Hire purchase finance is a little different, though. Because you’re covering the complete value of the vehicle, it’s not uncommon for your car to depreciate quicker than you can pay off your loan – particularly if you choose a newer model. This can result in negative equity, which means you owe more than the car is worth.
How to minimise car depreciation
Fortunately, while depreciation in some form is largely inevitable, there are ways you can minimise the drop in value of your vehicle.
Keep mileage as low as possible
As highlighted, the number of miles on your car can impact the rate of depreciation. To combat this, consider ways you might be able to drive less throughout the year such as car sharing to work with a colleague.
Simple steps such as regularly servicing and changing your oil can help to keep your car in the best shape possible, which should help reduce the rate at which it depreciates.
Look after documentation
It’s important to look after all your car’s documents, as they are proof of all maintenance, repair work, MOTs, and service checks. They provide evidence for future owners that the vehicle has been properly looked after.
Do your research
When choosing your new car, take the time to compare depreciation rates of equivalent or similar makes and models. This will give you a good idea as to which type of car retains its value best, and which could leave you most out of pocket.
It’s important to be able to recognise the ways you can minimise depreciation on your car, to ensure it retains as much value as possible when it comes to selling it on. Find out more about purchasing a used vehicle over on the Zuto blog, or explore our complete collection of helpful car finance guides.
Mike has worked at Zuto since 2018 and uses his experience within the industry to help customers understand the ins and outs of car finance.