Aug 10, 2021
How Does Car Deprecation Work?
If you’ve ever bought a new car, you will often hear that it will lose up to 30% of its value the moment you drive it off the lot. This immediate drop in value might not seem drastic, but it does continue to drop.
Although exotic cars tend to hold their value longer, depreciation is fundamental in the car world. It’s one of the reasons why drivers opt for used cars or they use it to help calculate the trade-in value.
So, what can you expect within the first year, or after a few years of driving a new car? Depreciation is simply a fact for every vehicle – it’s just a question of how much of that value disappears and why.
This blog will examine what depreciation is, how to calculate it, and how to prevent it.
What Is Depreciation On A Car?
When it comes to automobiles, depreciation explains how much the car’s value has decreased over time. It’s the difference between what you paid for the vehicle and what it is currently worth. Cars will depreciate for many reasons including how many kilometres you’ve driven it and how well you have maintained it.
With car insurance, depreciation can affect how much you’ll be reimbursed when you make a claim.
What Causes A Vehicle To Depreciate?
Vehicles depreciate due to many factors. Some make and models hold their value better, such as trucks, SUVs and sports car. Electric vehicles and luxury sedans are reported to lose their value faster. A few of the top cars with the lowest depreciation include Toyotas and Jeeps, versus BMW vehicles, which held three of the top ten spots for the highest rate. Here are a few more reasons that it will depreciate :
- The more mileage a vehicle has, the higher the deprecation will be.
- If a car is “like-new”, it will hold its value longer. The more scratches and damages, the lower the value.
- Cars with better fuel-efficient depreciate slower.
- If your vehicle has a high safety and reliability rating, it will hold its value.
- Technology such as Bluetooth, wireless charging and remote start are becoming more popular and even a standard in most cars. If yours does not have them, it can lower the value. New car safety features are also a bonus.
How Much Does A Car Depreciate Per Year?
Although the largest amount happens when you drive off the lot, some cars can lose 20% of their original value within the first year. After the fifth year, it could have lost up to 60% of its original value.
All vehicles depreciate at different rates, so the exact depreciation varies significantly from vehicle to vehicle. Studies show that new cars depreciate 20-30% per year.
However, to get a rough estimate, you can look up your car's current fair market value and subtract that from the purchase price. Remember to leave out any taxes or fees that you paid.
If you’re considering buying a car, look up the fair market value of older versions of the make and model to get a sense of the car’s value in the future. It's important to remember that every vehicle will have a different depreciation rate.
Here’s a sample calculation you can use to estimate how much your new vehicle depreciates each year :
- After year one = Purchase price x .20%
- After year two = Year one value x .10%
- After year three = Year two value x .10%
Based on the OMNI calculator, if you spent $32,000 on a brand new vehicle, the deprecation will drop the value to around $25,920 after one year, $22,080 after two years, and $18,560 after three years. It's important to remember that every vehicle will have a different depreciation rate when you are calculating yours.
How To Protect Your Vehicle From Depreciation
Depreciation is inevitable, but you can do a few things to minimize the impact it has on your vehicle. Here are a few tips to minimize deprecation :
- Schedule regular maintenance : Follow scheduled car maintenance. Getting regular oil changes, tune-ups, and using winter tires properly can help prolong the depreciation.
- Watch mileage : If possible, avoid putting an excessive number of kilometres on your vehicle.
- Be a safe driver : Accidents will cause a massive effect on depreciation. Minimize distractions when driving and do not drive impaired.
What Cars Depreciate The Least?
Various types of cars depreciate slower. This is possible due to the history of the vehicle and the improvements based on their build - manufacturers don't change a lot of the exterior and interior from year to year, therefore driving a new model isn't much different compared to an older one. On average, cars with the slowest rate depreciate 11% to 37% per year compared to 50%, or more.
| Vehicle | Deprecation | Dollar Value |
|---|---|---|
| Jeep Wrangler Unlimited | 30 % | $12,168 |
| Toyota Tacoma | 32 % | $10,496 |
| Jeep Wrangler | 32 % | $10,824 |
| Porsche 911 | 36 % | $56,133 |
| Toyota Tundra | 37 % | $17,020 |
| Toyota 4Runner | 38 % | $16,325 |
| Subaru WRX | 39 % | $14,192 |
| Dodge Challenger | 40 % | $16,303 |
| GMC Canyon | 41 % | $16,115 |
| Nissan Frontier | 43 % | $12,823 |
Top 10 Cars That Depreciate The Most
For some, buying a car is a big investment. However, some of those cars will see a huge crash in depreciation – some depreciate at twice the rate. Here’s a look at the top 10 vehicles that depreciate the fastest :
| Vehicle | Deprecation | Dollar Value |
|---|---|---|
| The Maserati Quattroporte | 72.5% | $97,178 |
| BMW 7 Series | 71.3 % | $75,555 |
| Nissan Leaf | 71.0 % | $25,350 |
| BMW i3 | 70.9 % | $38,922 |
| BMW 5 Series | 69.2 % | $44,673 |
| Acura RLX | 69.2 % | $42,913 |
| Ford Fusion Energi | 69.1 % | $29,590 |
| BMW 6 Series | 69.0 % | $69,524 |
| Jaguar XJL | 68.9 % | $66,879 |
| Chevrolet Volt | 68.1 % | $27,282 |
iSeeCars.com analyzed the above vehicles from 2014 to 2019. The car price is also adjusted to match the inflation of the 2019 dollar.
What Car Brands Depreciate The Least?
There are car brands that consistently make vehicles that depreciate at a higher or lower rate. This is often because of their strong reliabilty and ability to hold their re-sale or trade-in value.
According to J.D. Power, these brands will hold their value the most overtime :
- Hyundai (46%)
- Subaru (49%)
- Mazda (51%)
- Honda (51%)
- KIA (52%)
What Car Brands Depreciate The Most?
On the other hand, there are car manufacturers that are commonly known to have the highest deprecation rates :
- Volvo (63%)
- Acura (64%)
- Infiniti (66%)
- BMW (66%)
- Lincoln (73%)
How Does Car Depreciation Affect Your Insurance?
Depreciation and car insurance quotes are related. Since we are looking at how the value of something has declined, it can affect how much you’ll be reimbursed if you need to make a car insurance claim. In this case, an insurer will use the actual cash value or replacement cost.
If you are interested in protecting your vehicle again deprecation and replacement costs, you should consider the OPCF 43 enhancement form.
Car Depreciation FAQs
Ontario car insurance does not always cover car depreciation after a car accident. Your insurer may not cover the dimished value or be compensated for the value a vehicle loses after being damaged in a crash. Check with your insurer and policy to details to confirm if you would be covered.
Studies show that hybrid and electric vehicles from 2015 do depreciate faster, because they do not have the charging ability that newer models do. If you are thinking about getting one, ask yourself if it is worth saving money or gas or losing the deprecation value.
New cars can depreciate 20-30% in the first year. After that, it will drop around 10% per year.
Majority of cars will depreciate, but they will at different rates and for various reasons. Some classic cars will hold their value longer compared to new sports cars.
