There are some things that are inevitable in life and, sadly, one of those is car depreciation. It’s something that affects just about every car, with the exception of limited-run specials and some supercars, or, of course, when a car’s value has hit rock bottom.
So, what exactly is car depreciation, why does it matter and is there a way of avoiding it?
The definition of depreciation
Depreciation is essentially the difference in price between what you pay for a car and what you sell it for – whether that’s months or years later.
Depreciation’s something that affects some cars harder than others, which we’ll explain shortly. Cars generally take their biggest depreciation hit in the first year after new.
How does depreciation work?
Like with the majority of things, you’ll pay the most to buy them when they’re new. It’s the same with cars, with brand-new models worth the most, with their prices dictated by the manufacturer, though offers and discounts from dealers may help to bring the price down.
But as a car gets older – and as it’s used more often and the miles rack up – it’s worth less and less, and unlikely to ever be worth more than you paid new, unless you’re happy to keep it for decades until it earns classic status.
What factors affect depreciation?
There are a number of things that impact how much a car depreciates. We’ve split this down into three categories.
Desirability is a key part of depreciation, with ‘in-demand’ used cars likely to be worth more as there'll be plenty of buyers searching for such vehicles. It’s especially true of cars that are in short supply – sports or limited-edition cars, for example – although desirability can come down to simple things such as colour and trim level. Plainer colours, such as black, white or grey, are a safer option and will generally have far more appeal than a bright yellow or purple, for example. That’s because these vibrant shades are likely to appeal to a smaller number of people.
Many buyers choose a used car based on how cost effective it'll be to run and it’s why factors such as fuel economy and road tax play a particularly important role in depreciation – especially for hatchbacks and smaller cars that are generally cheaper to purchase.
Another factor that's increasingly impacting a car’s value is compliance with emissions regulations. London drivers who have vehicles that don’t meet the emission standards have to pay £12.50 a day to drive in the Ultra Low Emissions Zone. And the ULEZ area is being extended from 25 October 2021. Unsurprisingly, vehicles that will have to pay the charge are not wanted by London’s motorists, affecting depreciation.
Perhaps above desirability and running costs, though, what directly affects depreciation (and something you have control over) is a vehicle’s condition. An abused, dented and poorly serviced car will not be wanted by a buyer, and will not be worth anywhere near as much as an immaculate example. Keeping a car in good condition and well-maintained will always make it more valuable.
Mileage also plays a part in this, too, as many used car buyers like to buy something with fewer miles on the clock, and are happy to pay more for the privilege.
Why is depreciation important?
When it comes to car ownership, depreciation is often forgotten about, but it’s actually hugely important as it can be the biggest running cost associated with keeping a car. If you buy a car that loses its value quickly, it could leave you far more out of pocket than a car that holds onto its value.
Depreciation affects finance and leasing, too, because the cars that hold their value better can be leased or financed at more affordable rates. This is because they’ll be worth more to the companies once you return them, and it means they can be offered at lower monthly prices.
How can I avoid depreciation?
It might be stating the obvious, but the easiest way to avoid depreciation is by choosing a car that holds its value especially well. That said, this is often wildly unpredictable. New limited-edition sports cars are often some of the best bets, while Porsches are generally safer options to sink your money into. But these are really quite limited in terms of who can afford one to begin with.
Leasing a car helps to avoid the huge drop in price you get with buying a car outright, though, as because you don’t own the vehicle, you don’t have to worry about depreciation in the same way.