Car depreciation explained

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Introduction to car depreciation

You’ve probably heard the often-quoted statistic that the average new car loses 20% of its value as soon as it leaves the forecourt. This is due to what’s known as depreciation – the term used to describe the drop in a car’s value from when it’s brand new. Depreciation means that a car you own will be worth less over time, so you won’t get as much for it when you sell it as you paid for it. 

Cars typically lose 15 to 35% of their value in their first year, and 50% after their first three years. The rate of depreciation is dependent on a number of factors, including its age and mileage, condition and make and model, and we’ll look at these in more detail shortly.

If you’re considering purchasing a car, depreciation is something that’s worth paying attention to, as the car’s lower resale value can mean that you lose a significant amount of money. This means that you may not get a good return on your investment and that your true monthly costs are higher than you realise once that decline in value is split across the months or years you’ve owned it. 

This is particularly true for brand-new cars, but it affects most cars to a greater or lesser degree. As we’ll see later, a car subscription is a great way to enjoy the use of a car without having to worry about depreciation.

Factors that impact car depreciation

A number of factors affect the rate at which a car depreciates. These include:

• Age and mileage – older cars with more miles on the clock are worth less than new ones with low mileage. 
• Make and model – reliable and/or desirable makes and models of cars may depreciate more slowly, such as luxury vehicles. Mercedes, for instance, are renowned for their reliability and long life and so hold their value better than some of their competitors. Bigger cars tend to depreciate quicker because they’re less fuel-efficient and worse for the environment. 
• Number of owners – the fewer owners the car has had, the better.
• Condition – your car will depreciate more quickly if you don’t look after it with regular servicing and maintenance if you end up with lots of dents and scratches in the paintwork and if the interior has ragged and dirty upholstery. A full-service history adds value, as it proves the car has been cared for.
• Accident history – expect your car to lose a lot of its value if it’s ever been involved in an accident.
• Warranty – if your car is still relatively new and remains under the manufacturer’s warranty, this will give it a higher resale value.

Depreciation can also vary depending on your location and market trends. For instance, with the market gradually shifting towards electric vehicles, and demand for such cars at a sustained high, these will depreciate more slowly.

Understanding the different types of car depreciation

There are two main types of car depreciation: age-related and damage-related. Age-related depreciation occurs over time and varies according to the factors we described above, such as its make and model and mileage. 

Damage-related depreciation occurs as a result of wear and tear or accidents. Even the most well-cared-for cars are subject to general wear and tear, whether dents caused by someone opening their car door into yours, scratches in the paintwork or corrosion. You might scrape a wheel arch against the kerb while parallel parking or the demands of family life might mean you end up with a worn-out interior.

Wear and tear is usually something that can be fixed when your car needs sprucing up or things that you can put right should you decide to purchase the car. But accidents are a more serious cause of depreciation, and they can mean that a purchase is best avoided.

A serious accident will go down on your car’s permanent record, and you can look this up by putting the registration into an online database, which should tell you whether the car has been an insurance write-off. This has a big impact on the car’s depreciation, as it can mean that the safety of the vehicle has been compromised.

Managing car depreciation

While depreciation is inevitable, there are steps you can take to minimise it. These include:

• Choosing a popular make, model and colour – there will always be demand for these. Black, white and grey are the most popular colours.
• Keeping your mileage to a minimum – depreciation happens faster the more miles you’re putting on your car, so if there’s a journey you can take by train or a short trip you could walk or cycle, this will help keep your mileage low.
• Getting your car serviced regularly – take your car to an approved garage to get it serviced at the intervals advised by the manufacturer. As we’ve seen, a full service history adds value.
• Driving carefully – thrashing the engine will reduce its lifespan and lower the car’s value (as well as being worse for the environment!), so cultivate safe, economical driving habits to keep it in great condition. Take extra care in tight parking spaces and narrow country lanes, where the chances of scraping the car and damaging the paintwork are higher.
• Not ignoring niggles – if you hear a strange noise or have a warning light come on, get it checked – it could grow into a worse problem if you ignore it.

The resale value of a car is also impacted by aftermarket upgrades, modifications and customisation – such as remapping the engine or adding spoilers – which affect the cost of your insurance as well. To keep depreciation to a minimum, avoid any modifications from the manufacturer’s original specification.

Understanding car depreciation and car subscription services

If you’re worried about depreciation, a great way to avoid it is to opt for a car subscription instead of buying a car. This low-commitment option works like a Netflix subscription, allowing you to have a car on a rolling monthly basis on a contract you can cancel at any time. 

There’s no worrying about resale value or trying to get the best price when you get to the end of a car subscription – you just hand the keys back, at which point you get your month’s upfront payment returned to you. This is in stark contrast to the money you invest in buying a car outright when you’ll almost certainly get a lot less when you sell it than you paid for it. 

Similarly, the final lump sum you make on a personal contract purchase (PCP) agreement is a fixed amount based on the car’s predicted value after however many years your contract is for. If your car ends up being worth more than what you’re contracted to pay if you decide to keep it, that’s a win – but it could equally well end up being worth less.

With a car subscription, depreciation isn’t something you’ll ever need to think about. A flexible alternative to traditional car ownership, it also rolls all your ongoing running costs – such as tax, insurance, maintenance and breakdown cover – into a single monthly payment for easy budgeting. This is another major advantage over buying or leasing a car when you’ll need to budget extra for all these expenses, including unexpected repair costs such as replacing a cracked windscreen. 

With depreciation going on in the background on top of these upfront and ongoing costs, meaning that the car loses value with each passing day, traditional ownership options can end up being considerably more expensive than a car subscription.

The truth behind car depreciation

Car depreciation is an inescapable part of car ownership, but it’s an entirely avoidable part of car usership. If you’re investing in buying a car, whether it’s new or old, bought outright or on a lease, then depreciation is something you’ll need to factor in as an additional cost associated with the overall life of the car.

Because it has such a major impact on the value of a car, it’s important to make sure you understand what factors affect depreciation (and how you can reduce its rate) if you’re going to go ahead and purchase a car. Alternatively, if you’d like a flexible, low-commitment alternative that means you’ll never have to worry about your car’s resale value, opt for a car subscription instead.

Car subscriptions like ours provide cost-effective transportation that gives you access to the latest vehicles and technologies without having to think about how much value your car has lost the moment you drive it out of the showroom.

Find out more about Drive Fuze subscriptions by browsing our cars – you could have one on your drive in as little as seven days, and we’ll take the weight of depreciation off your mind.