by Andrew Rohrlich
Cars lose their value over time. A brand new car’s price is expected to drop by 10% to 15% every year after its purchase. However, that’s mostly the case in the first few years. After that, the average depreciation of a car usually “levels out.” Generally, you can expect your car to lose its value by 60% after five years.
Car depreciation refers to the financial difference between your vehicle’s purchase value and the selling price. While many cars depreciate quickly, others may retain their value quite well. This depends on a few factors, such as age, mileage, and accident history, among others.
Whether you want to estimate the market value of your car or buy a used car from a private seller, understanding the primary factors that affect your vehicle’s resale value can help.
Car Depreciation Explained
Let’s start with the basics: what is car depreciation? It is the monetary loss in a vehicle’s original purchase price caused by many factors. The primary ones include age, current mileage, make, model, ownership history, maintenance history, and more.
The primary reason for car depreciation is the changing “supply and demand.” The vehicles that retain their market value are those with high consumer demand.
This can apply to both brand new cars and used versions. The Kelley Blue Book’s director of residual value consulting, Eric Ibara, says that when the car’s demand is higher than its supply, it can effectively slow depreciation.
But how to calculate car depreciation? What major factors impact the car’s depreciation rate? Here are a few to consider:
- Current auction prices: The price people want to pay for a car determines the current market value of the car. Thus, the final auction price of a vehicle will indicate its selling price.
- Location: Your location can also play a significant role in the overall value of your car. Cars in warmer regions usually stay in ideal shape for a long time. So, their depreciation rate remains slower than that of cars in colder-weather states.
- Consumer perception: Most consumers perceive certain car makes and models as reliable, no matter how old they are. These perceptions can impact the depreciation rate significantly.
The Importance of Understanding Car Depreciation
Understanding the ins and outs of vehicle depreciation matters most for car owners. That’s because most auto insurers use a car’s depreciation rate to determine its total repair or replacement cost. Then, they offer different insurance coverage types and rates accordingly.
In many cases, insurers offer a replacement-cost option that pays you the replacement cost of your vehicle without involving car depreciation. Other times, they may offer you the actual cash value (ACV) option that pays you the money at the time of the total loss per your vehicle’s worth. The second option includes the car’s depreciation.
When you know your car’s depreciation, you will be well-prepared when choosing your coverage option. You can also easily avoid unfortunate situations, such as receiving a short-falling insurance check or an outstanding auto loan balance bill with no vehicle in hand.
The 7 Biggest Factors That Influence How Your Car Is Valued
Many factors impact car depreciation and resale value. Some of them are related to the vehicle’s original build, such as make, model, and body. Others include mileage (miles driven), age, and maintenance history.
The 7 most significant factors affecting car depreciation include:
1. Vehicle Age
A car is considered a depreciating asset that keeps losing its value in its lifetime's first decade or so. All vehicles are prone to usual wear and tear, so aging is an inevitable factor that decreases your car’s value.
However, if you own a vintage or specialty car, you may see an unexpected increase in its value over time. This is called value appreciation, meaning that the vintage car owner can expect a return on their investment. The factor of demand and supply plays a significant role here.
Since vintage cars or trucks are rare, with short supply and high demand, they become more valuable as they age. Also, these cars were manufactured manually by experienced craftsmen instead of robots or modern mechanics. Thus, vintage cars are perceived as vehicles that have withstood the test of time.
2. Make and Model
Make and model also contribute to the car depreciation value over time. For example, some car manufacturers may be less popular than they were five or six years ago. This decrease in popularity results in a considerable depreciation in their vehicles’ value.
However, some manufacturers can retain the value of their vehicles better than their competitors because of their reputation. Primarily, reputation isn’t associated with the vehicle’s overall performance in the market but only with a few factors.
For example, Audi and BMW are famous among car buyers due to their engineering quality. However, many people criticize their products for unimpressive resale performance. Still, these German passenger vehicles remain the highest-selling in the market.
On the other hand, Japanese makes, including Honda, Toyota, and Subaru, have a better resale potential, but they may not hold their value. American vehicles have also become popular for better resale value since the 2010s.
3. Mileage
The more miles a car has driven, the less its value is supposed to be. Even if the car looks spotless with no accident history, high mileage can make it less valuable in the market. So yes, you can preserve your car’s value by driving it less, but that may negate the reason you own a vehicle.
According to the U.S. Department of Transportation’s Federal Highway Administration (FHWA), the average annual car mileage in the country is about 13,500 miles. Any value over this figure will count as “high mileage,” while anything under is considered “low mileage.”
However, whether the mileage is high or low depends on the type of car. For example, for a high-performing car like a Porsche 911, an annual mileage of 15,000 miles is high, even though you won’t be driving it daily. When a car records more mileage than average, it has a higher risk for depreciation.
4. Overall Condition
Visible scratches, dents, and rusting can make a used car unattractive in the market. As a result, its resale value decreases, and the depreciation rate increases to 15-30%, excluding potential cosmetic and mechanical issues.
Not only the exterior but the interior also impacts the car depreciation rate. This includes the condition of seats, floor mats, odors, vinyl, and more. Thus, it’s recommended that sellers list their car for sale after improving its overall condition.
5. Customizations
Car owners love to customize their vehicle according to their preference. These modifications don’t always have a direct connection with the car’s value, yet some car buyers may believe that souped-up vehicles wear out more quickly than factory-original vehicles.
Using non-manufacturer parts can also lead to different issues in the car in the long run, especially for racing or off-roading cars. But if you use the right customization equipment, it can distract the potential buyers from focusing on the value.
6. Accident and Maintenance History
Accident and maintenance history is a crucial factor in determining car depreciation. Undoubtedly, poorly maintained vehicles have a more rapid depreciation rate than those receiving regular maintenance.
If your car is in a serious accident, it will typically have less of a chance of selling, no matter how much money you spend on its repair and maintenance. Many online car listing marketplaces include detailed car history reports to keep the buyer aware.
7. Economic Climate
Both global and country-specific economic climate indirectly impacts your car’s value and the entire used-car market. This relationship is briefly explained in the Manheim Used Vehicle Value Index, which includes more than 5 million used car sales annually.
Similarly, the index also showed how the market boomed in a better economic climate: the recovery of 2010’s global financial crisis, the late 2010s pre-pandemic growth, and the early 2020s post-pandemic regrowth.
If you’re a seller, waiting till the global and local economy rebounds from a downturn can offset your car’s value lost because of the extra depreciation period. Meanwhile, as a buyer, a poor economic climate can help you bargain more efficiently.
This article was written by Andrew Rohrlich. As a brand and product marketing expert, Andrew Rohrlich has crafted products, experiences and communications for household names like Gap and for multiple automotive technology businesses. For nearly a decade Andrew has studied automotive retail in depth from a customer point of view and aggregated the industry’s best research, thought leadership and know how to provide credible and important information to auto shoppers and sellers.
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