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Whether you're buying a new car or selling your old one, it's important to know how cars lose their value, what it could mean to you, and how it might affect your next car purchase or trade-in.
This is where depreciation comes in. Depreciation, which affects both new and used cars, refers to the value of your car dropping as it ages and collects dents, dings and mechanical wear. A study published in 2020 by automotive research firm and vehicle marketplace iSeeCars.com found the average car depreciation rate for a new car is 49.1% after five years of ownership. However, the rate of depreciation varies greatly depending on the vehicle's make, model, popularity, cost of upkeep and other factors.
Come along as we look under the hood of car depreciation, including how depreciation is calculated and how you can reduce depreciation.
How Quickly Do Cars Depreciate?
Since there are so many factors that affect a car's value, not all new cars depreciate at the same rate. New cars that retain the most value after five years are trucks, truck-based SUVs and sports cars, while luxury sedans depreciate the most, the iSeeCars.com study shows.
In the iSeeCars.com analysis, which looked at more than 8.2 million new and used cars, the Jeep Wrangler Unlimited topped the list of vehicles with the lowest five-year depreciation rate (30.9%). The highest rate belonged to the BMW 7 Series (72.6%). As you can see, depreciation rates vary widely, with luxury models tending to depreciate more rapidly due to their high starting cost and limited appeal on the used market.
New cars depreciate faster than used cars, with the value of a new car typically dropping by over 20% after the first year ownership then continuing to depreciate by 10% or so each year after that. After five years, your car could be worth roughly half of what you initially paid for it. Depreciation tends to slow once a car reaches the five-year mark, and essentially stops by the time a car is 10 years old.
|Vehicles With the Least Depreciation Over Five Years|
|Rank||Model||Average Five-Year Depreciation Rate|
|1||Jeep Wrangler Unlimited||30.9%|
|Vehicles With Most Depreciation Over Five Years|
|Rank||Model||Average Five-Year Depreciation Rate|
|1||BMW 7 Series||72.6%|
|2 (tie)||BMW 5 Series||70.1%|
|2 (tie)||Nissan LEAF||70.1%|
|4 (tie)||Audi A6||69%|
|4 (tie)||Maserati Ghibli||69%|
|4 (tie)||Mercedes-Benz E-Class||69%|
|8 (tie)||Mercedes-Benz S-Class||67.1%|
|8 (tie)||Lincoln MKZ||67.1%|
Why Does a Car Depreciate?
Several factors affect a car's depreciation. They include:
- Age: As a car gets older, its value tends to fall.
- Make and model: Popularity counts. The less desirable a make and model is on the used market, the lower a car's value usually will be.
- Mileage: The more miles that appear on a car's odometer, the more value the car characteristically loses by the time it's sold or traded in. A high odometer reading often means a higher cost of upkeep and shortens the vehicle's remaining useful life for the new owner.
- Condition: If your car has experienced normal wear and tear, the impact on depreciation usually is less than if there's been substantial damage, such as big dents on the outside or large stains on the inside. If the car's been in an accident, the value can be affected even if the damage has been repaired.
- Ownership history: If the car has been well-maintained and has had only one owner, it likely will be more valuable than if it's been poorly maintained and has changed hands between several owners.
- Gas prices: Fuel-efficient cars generally depreciate more when gas prices are low, while gas hogs depreciate more when gas prices are high.
- Color: Cars with a neutral paint color like black or silver may retain their value more than cars with "exotic" paint colors. That's because neutral colors tend to remain popular over time.
- Reputation: Cars that have a brand reputation for longevity and quality might depreciate at lower rates.
How Does Car Depreciation Affect You?
Car depreciation matters for several reasons. One major reason is that depreciation affects the trade-in or resale value of your car. Another reason: When the value of a car you've financed falls too quickly, you might end up owing more on your loan than the vehicle is actually worth.
Owing more than a car's value is called being underwater on the loan or having negative equity. If the car is totaled or sold while you're underwater, you likely won't be able to recoup the full remaining balance of the loan, in which case you'll have to make up the difference out of pocket. If this worries you, you might consider a gap insurance policy.
On the bright side, however, you might be able to shed some of your insurance coverage and reduce your premium as a car depreciates. Just be sure to take good care of the car so those savings aren't completely offset by repair costs as the car ages.
How Can You Reduce Your Car's Depreciation?
Fortunately, you can control some of the factors that affect your car's depreciation. Among the things you can do:
- Drive less. Putting 10,000 miles or less on your car each year will keep the numbers on the odometer lower and might help decrease maintenance costs and damage.
- Keep up on maintenance. Regular oil changes and other routine service can keep your car in better shape and help it retain value. Nobody wants to buy a car that needs a full engine rebuild to get it roadworthy, after all.
- Preserve the car's maintenance records. Having all that paperwork in hand can boost the resale value of your car, as it'll show a potential buyer that you properly maintained it.
- Tidy up the interior. Regularly cleaning the seats, dashboard, carpets and other interior features may help rev up your car's value.
- Protect the exterior. Storing your car in a garage can shield it from the elements. This might help preserve the exterior of the car, including the paint.
The Bottom Line
A car represents one of the biggest purchases that you'll make. Given that Kelley Blue Book says the average new car in the U.S. cost $38,723 in September 2020, you should appreciate your ride as much as possible—by keeping it in the best condition possible, for instance—so that it doesn't depreciate too rapidly.