Depreciation Explained

Car Depreciation: Definition and How It Works

Depreciation is the loss of real value over time. There are many factors that aid in depreciation, and a few things you can do to slow it, but depreciation can't be stopped.

Vehicles depreciate because of use, wear and tear, age, and other factors, and it starts as soon as you drive off the dealer's lot.

Factors that Affect Depreciation

Many factors affect depreciation, and there are certain things that you can take into consideration before you buy, like which makes and models have a history of holding their value, and certain things you can't, since you never know what can happen on the road. Here is a list of things you should think about that impact depreciation rates.

• Brand – Certain brands have a reputation for holding on to their value, such as Honda and Toyota. You can typically research brands and their reputations by visiting sites like Consumer Reports, to see where these vehicles rank among consumers who have them.
• Vehicle Age – New models depreciate faster than used ones, which have already seen their steepest depreciation early in their lives. Most vehicles can lose up to 20% of their value in the first year of ownership alone, and may lose around half their value after five years. The biggest one-time drop typically happens as soon as you drive your vehicle off the lot. According to Kelley Blue Book, vehicles lose 10% of their value in their first drive.
• Mileage – As a vehicle ages, the more miles you put on the car, the quicker it's likely to depreciate. Driving means wear and tear, and more miles equal a higher chance for breakdowns. Keeping your mileage as low as possible will help you preserve the value of your car.
• Condition – Wear and tear from driving isn't the only way to get some damage on a car, and the worse the condition of your vehicle, the less value it will have. To protect the equity in your car, try to keep your vehicle in good shape. This means regular maintenance and staying out of accidents.
• Fuel Type – The type of fuel your vehicle uses (gas, hybrid, electric) can impact your depreciation. EVs typically depreciate faster than gas cars, but that dynamic is shifting as technology advances. Hybrid vehicles depreciate slightly slower than gas vehicles, but PHEVs seem to do worse than both gas and EV models.
• Demand – If you drive a particularly popular model vehicle, you may find your car's depreciation is slower than that of others. The more desirable a vehicle is, the longer it's prone to hold on to value. More value equals less depreciation.
• New Models – As more new models and refreshes hit the streets, older cars become less desirable, especially of the same models. The less someone wants your vehicle, the less resale value it will have. Lower resale values can contribute to higher or faster depreciation in used cars.

How to Calculate Depreciation

To calculate how much your vehicle has depreciated, you need to know both the original value of your vehicle and its current value. The formula is as follows:

Depreciation = (Original Value - Current Value) / Original Value × 100%

Let's assume you purchased a $35,000 vehicle three years ago. Let's assume an average depreciation rate of around 15% a year, which would make the current value of your vehicle $21,494. So, applying the formula, you get:

• (35,000-21,494) / 35,000 x 100%
• = $13,506 / $35,000 × 100%
• = 0.386 × 100%
• = 38.6%

In this example, your vehicle has depreciated almost 40% in just three years.

Fastest & Slowest Depreciating Cars

Luxury vehicles, EVs, and models that never quite gained popularity are some of the quickest cars to depreciate, while popular models, certain brands, and certain working-class vehicles tend to hold on to more value.

Many Toyota, Honda, and Subaru models land on the slow depreciation list, along with some surprises like Porsche models. Quicker depreciation happens for models that are more on the luxury side, but also impacts EVs and models that don't sell well in the U.S.

How to Reduce or Manage Depreciation

Depreciation is unstoppable, but it can be slowed in some regard. In order to slow the progression of the loss of value, it's important to keep your car as clean and well-maintained as possible.

Here are a few tips to keep in mind:

• Avoid accidents
• Keep your mileage low
• Get regular maintenance done
• Fix minor dings and scratches
• Keep your car clean inside and out
• Get regular car washes
• Choose a make and model known to hold its value

Another way to manage depreciation is to pay attention to your car's value over time, so that you can sell it before it's seen too much depreciation. You can use online valuation sites, such as Kelley Blue Book, to keep track of your car's value. The trick is to sell the car while it still has enough value for you to use toward your next vehicle. Since all cars depreciate differently, exactly when that is will be up to you.

Depreciation and Mileage Impact

Higher mileage means faster depreciation. When a vehicle ages, it doesn't do so at a consistent rate, and the more you drive, the more wear and tear will occur on your car. Keeping your average mileage under 10,000 miles a year can slow depreciation. On the other hand, if you put 15,000 to 20,000 miles on your vehicle in a year, you're car will depreciate much more quickly and be considered a high-mileage vehicle when you are trying to sell it.

Conclusion

Understanding depreciation as a vehicle owner gives you the ability to make smarter purchase decisions that can save you money over time. For instance, buying a vehicle that's known to hold its value can save you thousands over the years.

Additionally, knowing how much value your car loses over time is key to better planning for resale, maintenance, and insurance. If you know you're buying a car that depreciates quickly, and you have a loan, you can plan for things like GAP insurance when you know how much value your vehicle loses in a year. This will help better protect you in the event of an accident where the insurer only repays the value of your vehicle, not the total on your loan.

Frequently Asked Questions

How does car depreciation affect insurance payouts?

Depreciation directly impacts the amount you will get from the insurance company if your car is stolen or damaged in an accident. This is because the insurance company typically pays you the actual cash value or ACV of a car. ACV is the total purchase price minus depreciation.

Do electric cars depreciate faster than gas vehicles?

Typically, EVs lose their value more quickly than standard fuel cars, especially if the EV isn't a popular model. However, some EVs now hold more value as technology moves forward, especially more popular models, such as Teslas.

How is trade-in value different from depreciated value?

Depreciation value is the amount of value that has been lost over time. Trade-in value is the amount a dealer will offer to buy your car as part of another vehicle sale. Depreciation can impact the trade-in value of your vehicle.

Are depreciation rates different for luxury vs. economy cars?

Luxury vehicles depreciate much more quickly than economy cars because of their higher initial cost, greater cost to maintain, and lower demand and resale potential.

How much value does a car lose per year on average?

Sources disagree on exactly how much value a vehicle loses per year, but it's proven that cars lose more value in the first year than in the next few years. Though there's no hard and fast rule, most cars depreciate around 10% to 20% a year for about five years, and then depreciation slows.

Is car depreciation tax-deductible?

Depreciation is typically only tax-deductible on a car when the vehicle is used for business purposes, as long as it's used for business the majority of the time. Typically, you can either deduct mileage or actual expenses, but you have to document everything and keep track of your business expenses versus your personal vehicle expenses.