Why Do Cars Depreciate So Much

If there’s something most of appreciate less than anything else with our cars, it’s depreciation. The odd flat tyre or not being able to squeeze out the fuel economy you thought you were going to get might be frustrating, but there’s nothing we can do about our cars losing value over time…or is there?

What is depreciation?

Put simply, depreciation is the difference between what you pay for your car, and what it’s worth when you come to sell it or trade it in. It’s something of a silent assassin for many of us, as depreciation is the biggest cost you face when buying a new car, even more so than filling it up with fuel on a regular basis.  The residual value of your car is what it’s going to be worth when you come to change it. On average, new cars have a residual value of around 40% of what they cost when they were brand new after three years. To break that down, it means that new cars lose 60% of their value in just three years. However, the first year’s the most painful, as cars typically lose 40% of their value after year one. 

Why is the first year such a hit? 

The moment you buy a car and drive it away from a dealership, it’s classed as a used car. Whether you own it for ten minutes or ten years, anyone looking to buy your car sees it has a previous owner, which makes it less attractive. The fact that there could be a newer model out also affects depreciation, as does the length of warranty - if any - remaining, and the fact you’ve got to start spending money on things like MOTs, servicing and maintenance.

What does it mean for me? 

The actual cost of depreciation depends on how much you spend on your car. For instance, if you only spend £10,000, after three years your car’s going to be worth around £4,000, so depreciation has cost you £6,000. If you splash out £50,000 on a new set of wheels, in theory it’s going to be worth in the region of £20,000 after year three, costing you £30,000.

Is it really as simple as that? 

In a word, no. Depreciation depends on a number of different factors, including mileage and condition. Plus, the model you buy has a major influence. Luxury cars such as the BMW 4 Series or Audi A5 have much stronger residual values than less desirable models where the value drops quickly.

Can I avoid it? 

Unless you’re buying a rare car where its value could even be higher than what you paid for it by the time you get it delivered - like what happened when the Audi R8 was first released - you can’t really avoid depreciation on new vehicles. Going for something that people are going to want to buy second hand when you’re ready for something different is a good way to minimise the impact though, with brands like Mercedes, Porsche and Land Rover offering low depreciation rates. 

Having said that, you may want to consider buying second hand yourself if the thought of depreciation is too much for you. Buying a car that’s three years old will see you avoid the steepest drop in value, while five-year-old motors are even better when it comes to losing less value. Remember though that you’re going to have to MOT cars of this age though, while servicing and maintenance costs are higher than on new vehicles. 

What about minimising the effects? 

There are certainly ways you can look after your car’s residual value to ensure it’s worth as much as it possible can be when it’s time to part company. From keeping the mileage down where possible, to looking after the state of your car both inside and outside, and keeping on top of the service schedule, there’s plenty you can do to lessen the effect of depreciation. 

Or, consider leasing deals where you don’t have to worry about residual values, big repair bills and even servicing and maintenance costs if your contract includes those. This is a great way to get a new car every few years, and at Inchcape we offer a variety of finance packages to suit your needs.