Car Depreciation: What Factors Affect Car Values?

What Causes a Car to Lose Its Value?

A new car begins to depreciate immediately. After you drive off the dealership's lot, you’ll still be enjoying the new car smell, but you’ll be shedding a ton of value with every mile – even when you’re not driving it. The average new car depreciates by as much as 30% by the end of the first year of ownership and an additional 15% to 18% each year, for a total of about 60% of the original value lost by the end of year five.

On the upside, depreciation tends to level off after a while, so the longer you keep your car, the less its depreciation will eventually matter. On the downside, if you want or need to sell the car or trade it in within the first few years after buying it, you’ll be taking a huge loss. 

You can minimize the hit to your wallet, though you can’t avoid it entirely. The following slides will show you some of the factors that affect depreciation, and how you may be able to mitigate them.

Mileage

The odometer reading is one of the biggest factors in a car’s depreciation. The more miles a car has, the less it’s worth. The national average is about 15,000 miles per year; more than that will cause more depreciation, and fewer miles may make your car more appealing than the competition – and therefore more valuable – to a potential buyer. There are exceptions to this rule, however. Putting 15,000 miles a year on a sports car or luxury car – generally, any car that a typical owner wouldn’t drive daily – will be seen as excessive.

Fuel Prices

When gas prices are low, large and thirsty vehicles like SUVs become more popular. When gas prices are high, consumers tend to turn toward small cars, hybrids, and electric vehicles. If you happen to be selling your car or trading it in when it coincides with fuel trends, you’ll likely be able to sell at a higher price as a benefit of the increased demand.

Supply and Demand

If you have a car that a lot of people want, it’ll minimize the depreciation hit. If you have a car that’s easily available, you might experience even more depreciation because potential buyers have a lot to choose from. There are some specific factors that influence supply and demand – the previous slide, discussing fuel prices, is one example – but sometimes you’ll just get lucky owning a car that gained popularity a few years down the road. On the other hand, you might get unlucky when everyone who has the same car as you decides to sell at the same time.

Accident History

If you want to maintain your car’s value as much as possible, drive safely. A car with one or more accidents will be worth less at trade-in or sale time, because those marks on the record will show up in its vehicle history report. Even if the car was in a minor accident and the damage was professionally repaired, a lot of potential buyers would rather buy a car with a clean vehicle history report.

Want Luxury? Enjoy It While You Can

Driving off in a brand new luxury car might feel great, but chances are, it’s going to drop in value faster than a car from a non-luxury brand. Nearly all of the 10 fastest-depreciating car models over a three-year period were luxury cars. Furthermore, luxury cars from Japanese and Korean brands hold their value better than European and American luxury cars, according to an Autotrader report.

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Body Style

Depreciation data reveals another interesting insight, namely that sedans tend to depreciate more quickly than other types of vehicles. The basic four-door has a lot to offer, yet its popularity is suffering compared to crossovers and SUVs. This is happening to new cars in dealer showrooms, and it’s likely to affect the value of a sedan on the used car market, as well.

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Features And Options

The more options and add-ons your new car has, the more it’s likely to depreciate. That’s in part due to potential used car buyers shopping based on price and value instead of looking for specific features. Another factor is that the higher starting price compared to a base model of the same vehicle means the price has farther to fall. However, this isn’t a hard and fast rule. If you skip out on an amenity that consumers tend to take for granted – think of features that are included on at least half of new cars, such as power-adjustable seats – potential buyers might be disappointed that your car is missing key equipment.

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Electric Cars

Electric cars tend to depreciate fast, thanks to a few factors working against them. They cost more when new, so the percentage of value they lose over the first few years is higher. There are also more of them entering the used marketplace year after year, giving buyers more choices. Finally, electric cars are an unusual segment in that there’s been lots of technological advancements in recent years.

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If You’re The One Buying …

Depreciation is bad news for those selling or trading in a car that’s a few years old, but if you’re the one shopping, you have an advantage. Cars that depreciate the most are typically the best value for used car shoppers. However, there’s an exception to the rule, and that’s that luxury vehicles – particularly from European brands – tend to have above-average maintenance costs after the first few years. You might save a lot of money on the sticker price compared to buying new, but be sure you have room in your budget for upkeep and repairs.

New Vs. Used, From a Shopper’s Perspective

Finally, don’t assume that depreciation automatically makes a used car a better deal. If you’re trying to decide between a new car and a similar used model, run the numbers both ways. If you’re paying cash, you’ll almost certainly save money buying used. However, if you’re planning to finance your used car, your loan will probably have a higher interest rate than you could get on a new car. This is thanks to auto manufacturers’ aggressive incentivizing to boost new car sales. In some cases, the new car might be a better deal – or close enough – especially if you qualify for very low interest rates.

More Shopping Tools From U.S. News & World Report

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