If you’re looking to put a brand new $40,000 car in your driveway, we’ve got some expert advice: Buy a vehicle with a sticker price closer to $45,000. That’s one way to look at depreciation. Our data shows that cars can lose more than 10 percent of their value during the first month after you drive off the lot. The amount your car is worth will just keep falling, too.
According to current depreciation rates, the value of a new vehicle can drop by more than 20 percent after the first 12 months of ownership. Then, for the next four years, you can expect your car to lose roughly 10 percent of its value annually. This means that a new car can be worth as little as 40 percent of its original purchase price after five years.
Of course, you may not be concerned about the “average car,” so we’re ready with information about how specific factors can affect vehicle depreciation.
What is Depreciation?
The modern concept of depreciation was developed in the 19th century so that the big railroad companies could show more profits. With a little accounting magic, the cost of laying track and building trains wouldn’t be subtracted from their yearly income all at once. Instead, the companies calculated how much a train, for example, was “used up” each year. They assigned a value for that use and then counted this smaller amount against their annual income until the train’s value was down to zero. In the same way, a car’s depreciation essentially represents how much of a vehicle’s value you’ve used over time.
Another important factor came into play as industries became more technologically advanced. At that point, corporations had to worry about assets that didn’t necessarily wear out, but did lose their value as more sophisticated replacements became available. Think of a business computer or, for car buyers, a vehicle without modern safety technologies. Both become less and less valuable as newer and newer capabilities are developed for the latest products.
What Else Affects My Car’s Value?
If you want to drive a new car, you usually have to pay more than that car’s really worth in the first place. After all, you’re not only paying for a vehicle, you’re also covering taxes, fees and the cost of running the dealership. The same goes for certified pre-owned vehicles and traditional used cars bought on a retail basis. When you compare your total outlay for a vehicle against its value, you’re running at a loss even before you get the car off the lot.
Then there’s the matter of perception. Luxury cars and cars from certain well-regarded mainstream brands can hold their value better than others simply because of their reputations. The way people perceive different types of vehicles can also impact their depreciation. For instance, when trucks and SUVs are in higher demand than cars, the former will have higher retained values, too, since people are willing to spend more money for them.
Can I Do Anything to Reduce Depreciation?
There are a few basic guidelines that will help your car hold its value. First, because depreciation is the price you pay for using your vehicle, you can soften the blow by using your vehicle less. The tipping point is right around 10,000 miles a year. Any more and routine wear and tear begin to really take their toll on a vehicle.
Which brings us to the importance of routine maintenance. By keeping up with service, such as putting in a fresh oil filter, you’re replacing worn and torn parts with new ones. This goes right to the heart of what traditional depreciation measures. If you’re worried about the impact of technology changes on your car’s depreciation, you can also guard against that. Carfax research indicates that if you buy a new car with high levels of safety technology, it will hold its value better over the first five years that you own it.
Where Can I Find Out How Much a Specific Car Has Depreciated?
Typical car depreciation calculators can give you a rough idea of how much value a vehicle has lost over years. If you want more accurate information, however, you can rely on the Carfax History-Based Value tool. This starts with the generic factors that can affect value, like how old a car is and what features it has. Next, Carfax leverages the data from its Vehicle History Reports to see how that specific information impacts depreciation. This takes into account details like the service records, accident history and number of owners for that exact car or truck.
Getting a better handle on a vehicle’s “real” value can also help you save money when shopping. If you’re selling, it can also improve your chances of getting the best price.
Editor’s note: This article was originally published in December 2014. It has been completely updated for accuracy and comprehensiveness.