Depreciation is simply the difference between the amount you spend when you buy a car and the amount you get back when you sell or trade it in. It's often overlooked or ignored when buying a new car but for many, depreciation is the single biggest factor affecting running costs adding more to cost per mile than fuel.
Fleet managers talk of forecast future values or residual values – the value a car purchased today is expected to retain by the time it is scheduled for replacement. The average new car will have a residual value of around 40% of its new price after three years (assuming 10,000 miles/year) or in other words will have lost around 60% of its value at an average of 20% per year.
While the percentage drop may be similar the actual cost of deprecation clearly varies hugely between a small cheap car and an expensive luxury car. Buy a car for £10,000 and it might cost you £2000/year in deprecation and be worth around £4000 after three years but spend £50,000 and the bill for depreciation will be more like £10,000 per year.
Unfortunately it's not quite as simple as that though because, as well as age, depreciation is affected by mileage and condition and also varies a lot between different models. Focussing simply on purchase price when you buy a new car might mask the possibility that a more expensive car with good residuals could cost you less in the long run than a cheaper car the value of which drops like a stone.
Typically the rate of depreciation slows with age
Cars that depreciate more slowly
Cars that are more fuel efficient tend to depreciate more slowly because of increased interest in cars that are cheaper to run.
Depreciation is also affected by model replacement cycles so a brand new model may depreciate more slowly than one on the way out, shortly to be replaced by a newer version.
A long waiting list is a sign that demand exceeds supply - depreciation might be lower as a result.
Check price guides or used car listing sites to get an idea of how much the car you're thinking about buying today might be worth at the age and rough mileage you plan to replace it.
Depreciation slows as the car gets older so you may find that a nearly new car (one to two years old) is better value than a brand–new one.
If your annual mileage is low then a high mileage ex-fleet car could be a good buy. You get the benefit of higher depreciation when you buy but the total mileage might be closer to average for its age by the time you come to sell.
Buying a five–year–old car may be an even better option. You won't get the latest features, but it won't lose so much in value. And you won't be shelling out so much each month on interest to repay a loan.
But it's only better value if your mileage is low – under 10,000 miles a year.
Your repair and maintenance bill will be higher and less predictable the older your car is and these costs will increase as your mileage goes up.
Eight year old car
By the time a car reaches this age it's pretty much done all the depreciating it's going to do. Risks are higher too though and it's more likely that a one off repair bill could cost you as much or more than a year's depreciation would have done on a newer car.
A forecast of what your new car might be worth when you come to sell it at some time in the future is exactly that, a forecast based on a large number of assumptions about the market and the future condition of the car. To maximise retained value:
- Keep the car in a good clean condition
- Keep mileage down
- Make sure that servicing is done according to the manufacturer's schedule
- Keep a comprehensive service record and attend promptly to any repairs required.
Manage your risk
Leasing can look expensive but it's an effective way to manage depreciation costs and the risk of big repair bills– as long as you're okay with not owning the car.
You pay a fixed monthly amount for the car, which generally includes servicing and repairs. It spreads your costs over the year, and it may work out to be the cheapest option, particularly if you cover a lot of miles.
Watch out for mileage limits on the contract though – excess mileage can be very expensive
AA running cost tables
Our running cost tables include depreciation under standing charges – those costs associated with owning a car that you have to pay whether you use it or not.
We assume that depreciation costs are averaged over four years from purchase, and include typical adjustments for different annual mileages in that period.
We use different depreciation rates for mileages which differ from the average 10,000 miles/year.
(23 March 2012)