Car depreciation guide
Fact-checked with HomeInsurance.com
Like most expensive items, cars lose value over time. When you resell your vehicle, you will inevitably receive less money than what you originally paid for it. But some cars depreciate faster than others, and specific factors determine how quickly a car will lose value.
We’re going to explore the basics of car depreciation, including what causes cars to depreciate, which models depreciate the fastest and how you can reduce your car’s rate of depreciation.
What is car depreciation?
Depreciation is the rate at which a car loses value. In other words, it’s the difference between what your car was originally worth at the time you purchased it, and how much your car is worth when you sell it. As soon as you drive away from the dealership, your car immediately starts to depreciate in value.
Understanding vehicle depreciation is important if you plan to sell your vehicle. It helps you figure out how much you can realistically sell your car for based on certain factors, like the make and model, year, mileage and overall condition.
What causes cars to depreciate in value?
The average cost of a brand new car is $36,718 in the United States, according to Edmunds’ analysis in 2019. But the car’s value will drop most significantly between the first day it’s driven and in the five years following. Factors like mileage, fuel economy, interior and exterior damage, consumer preferences and manufacturer reputation can all cause a car to depreciate. The table below depicts a car’s potential depreciation over five years and the resulting value, based on the average cost of a new vehicle purchased in 2019:
|Initial Car Value||100%||$36,718|
|Depreciated value after:||Percentage of original value:||Resulting value:|
How quickly do cars drop in value?
As you can see in the table above, the average car depreciation for a new vehicle is rapid and substantial. Over the course of five years, a new car costing $36,718 will lose more than $22,000 in value. The moment a car leaves the lot, it loses approximately 11% of its value, on average. Within the first five years, a car will lose 15-25% of its value every year. After five years, the average car is worth 37% of its original sticker price. Cars lose the most value in the second and third year.
Based on the figures in the table above, here is how much value is lost on a $36,718 car between 1-5 years after the date of purchase:
- One minute: $3,305
- One year: $3,672
- Two years: $4,406
- Three years: $4,039
- Four years: $3,305
- Five years: $3,304
Car depreciation by model
Some car models depreciate faster than others. For instance, trucks and SUVs tend to hold their value better than sedans or convertibles. Cars that are generally considered safe and are low maintenance are more likely to hold their value for longer. The car manufacturer can also impact depreciation. For instance, car companies that have made headlines for recalls or safety issues could cause certain makes and models to depreciate more quickly.
Top vehicles with lowest depreciation
In the car depreciation chart below, we’ve listed the cars that have the lowest depreciation over five years:
Vehicle value after:
|1 minute||1 year||2 years||3 years||4 years||5 years|
|Jeep Wrangler Unlimited||$28,951||$25,770||$21,952||$18,452||$15,589||$12,726|
Top vehicles with highest depreciation
The table below includes the cars that have the highest depreciation rate over five years:
Vehicle value after:
|1 minute||1 year||2 years||3 years||4 years||5 years|
|BMW 7 Series||$78,669||$70,024||$59,650||$50,141||$42,360||$34,580|
|BMW 5 Series||$49,049||$43,659||$37,191||$31,262||$26,411||$21,560|
How to Reduce Your Car’s Rate of Depreciation
Identifying trends and knowing what variables within your control affect depreciation can help. For example, luxury vehicles and electric vehicles have exceptionally fast depreciation rates, so avoiding those specific categories will limit depreciation over time. Popular cars like the Jeep Wrangler depreciate slower because there is a high demand on the used market. Even trivial things like color can cause certain models to depreciate faster than others.
In addition to strategically selecting make and model, here are some suggestions to help limit depreciation:
Limit your mileage
The odometer reading on your vehicle has a big impact on its value. A car that has 100,000 miles is worth much less than a car with 10,000 miles. To slow your car’s depreciation rate, consider how often you’re driving and cut back on mileage where you can.
Be selective with your color choice
Neutral colors are your best option if you want to limit your car’s depreciation. Silver, black and white cars tend to have the highest resale values. Vibrant or custom colors might look sleek, but they can cause your vehicle to lose significantly more value over time.
Keep up with regular maintenance
Taking your car for regular maintenance services can help reduce the speed of depreciation. Keep a copy of the service records so you can show it to a potential buyer down the road. And unless you’re a qualified mechanic, have the professionals handle your car repairs.
Avoid accidents at all costs
When you sell your vehicle, the interested buyer will likely want to see an accident report for the car. Vehicles that have been involved in an accident typically depreciate much faster than cars with no accident history, even if repairs were made.
Determining the value of your car
There are certain factors that contribute to the value of your car that don’t directly impact depreciation; the location of your car is one of those factors. For example, a used convertible is worth more in Florida than it would be in Montana. The features of your car can also predict value. Cars that have all-wheel drive, a panoramic sunroof or a modern sound system tend to hold their value over many years.
To determine the value of your car, use sources like Kelley Blue Book or Edmunds to gauge the vehicle’s resale price. You can search the database for your car’s make, model and year, the mileage and your ZIP code. You can also see what other people are selling the same car for.
Other costs aside from depreciation
Before you buy a car, it’s important to consider its potential value depreciation, but you should also consider other costs associated with your vehicle choice. For example, consider the gas mileage of the vehicle, the cost of insurance, the cost of maintenance, the monthly loan payments and registration and title fees in your state.
Car insurance and depreciation
When you purchase a vehicle, you buy car insurance to protect the car at its current value. But over the years, your car will lose value through depreciation. That means you may be able to lower your car insurance coverage limits to match your car’s depreciated value.
At a certain point, your car will lose so much value that you may only find liability coverage necessary. Consult with your car insurance company to ensure your coverage matches the value of your vehicle. However, if you have a loan on the vehicle, depreciation may not be a factor in how much coverage is required as that is set by your lender.
- Cars lose significant value in the first five years.
- Certain car makes and models depreciate faster than others.
- There are ways to slow your car’s depreciation rate, but all cars lose value over time.
- The value or depreciation of your vehicle may factor into your car insurance coverage.
Many costs are associated with car ownership, but factoring in depreciation can be easily overlooked. If you plan to resell your car in the future, do some research to avoid buying a car that depreciates quickly. If you keep your car in good condition, limit your mileage and avoid accidents, you can effectively slow down your car’s depreciation rate.