When you drive a new car off the lot, it automatically loses value. This pattern, which continues over time as you drive the vehicle, is known as depreciation. But the amount by which a vehicle depreciates varies. Read on to learn more about how car depreciation works and tips to preserve your vehicle’s value.
What is Car Depreciation?
Simply put, vehicle depreciation is the difference between what the car is worth and the original value or what you paid for it. Unless you own a collectible or classic car, your vehicle will lose value or depreciate over time.
On average, the depreciation rate is between 15 and 20 percent for most vehicles. However, it varies by your car’s age, make, model, mileage and condition.
How Quickly Do Cars Depreciate?
Right After Buying It
Unfortunately, cars lose value the moment they’re purchased and driven off the lot.
After a Year
Most vehicles lose up to 20 percent in their value after the first year following production.
After Five Years
The depreciation rate drops to roughly 15 percent on average between years two and five.
After an Accident
Accident-free vehicles are generally worth more than those that are the same make and model but have been involved in an accident.
What Causes a Car to Depreciate?
The Car’s Age
With age comes a dip in the car’s value.
Mileage
Cars with higher mileage also drop in value as the need for repairs becomes more likely.
Make and Model
Select manufacturers, like Honda and Toyota, generally come with lower depreciation rates than others.
History of Ownership
Owners who keep up with routine maintenance and repairs are more likely to command a higher resale value than those who don’t.
The Car’s Condition
Cars that are well-maintained typically won’t depreciate as fast as those with owners who failed to keep the exterior in good shape and have routine maintenance completed.
Fuel Price
Many buyers focus on fuel efficiency when shopping for a new car or truck. However, if the average miles per gallon are on the lower end, some consumers tend to shy away, decreasing the demand for a particular vehicle. Consequently, some of these vehicles also tend to depreciate at a far more rapid rate than others.
The Car’s Color
That shiny paint job may turn heads when you’re cruising down the highway, but it can mean bad news for your car’s value. So, skip the bright colors and stick with neutral colors instead to help preserve the resale value of your ride.
How Do You Estimate Your Car’s Depreciation?
Use a car depreciation calculator or the following formula to determine the estimated depreciation of your vehicle:
- Purchase price * Average five-year depreciation rate = Annual depreciation
To illustrate, assume you purchased a Toyota Tacoma for $28,500, and the average five-year depreciation rate is 13.8 percent. Using the formula above, your vehicle will lose roughly $3,933 in value each year. At the end of year five, it’ll be worth $8,835.
Does a Car’s Depreciation Affect Your Loan?
Are you considering refinancing your current loan to get better terms? Even if it’s depreciated quite a bit, you may still be able to get a new loan if you’re not upside on the loan (or owe more than it’s worth).
Tips to Minimize Your Car Depreciation
Reduce Your Mileage If You Can
If possible, aim to keep your annual mileage at or below 14,000 so it doesn’t exceed the national average. Otherwise, you risk depreciating your car at a faster rate.
Keep Your Maintenance Up-to-date
Even if it’s costly, have routine maintenance done in a timely manner, and be careful not to overlook or ignore vital repairs. Doing so can help you earn more money for your car when it’s time to sell it, and you can prove it’s been properly maintained.
And Keep the Records
Store all vehicle-related records in a safe place. That way, you can retrieve them at any time if you need to file a warranty claim or a prospective buyer wants to take a look.
Minimize Customizations
Add-ons are visually appealing but can make your car less marketable when it’s time to sell it.
Always Keep Your Car Clean
A well-maintained car is less likely to have loads of exterior damage, like dings or dents, over time. And if they are present, be sure to address them right away. Aim to wash and wax your car often or hire someone to do it for you.
Don’t Eat or Smoke in Your Car
It’s equally important to maintain your vehicle’s interior, starting with regularly vacuuming to keep it clean. Also, refrain from eating and smoking in your car to help prevent unwanted stains and odors that are challenging to get rid of.
