Car depreciation is the difference between the value of a car when you bought it and what it’s actually worth when you want to sell it later—a.k.a. its resale value. A car’s value goes down over time, thanks to the wear and tear of everyday use.
What makes a car depreciate?
Whether you’ve bought a new or used car, one thing is for sure: Your ride begins losing value the second you purchase it. This loss of value is what we call ‘depreciation.’ But not all cars depreciate equally.
A number of factors are involved. For instance:
- The brand and type of car will have a big impact on vehicle depreciation. If the car is popular, it will probably retain its value better because of the basic rules of supply and demand.
- If you purchase a great car that was made in an off year, that impacts how quickly it depreciates. The age of the car also has a significant impact. The older and less desirable a car is, the lower its value.
- Mileage also influences depreciation. If your car has high mileage it will resell for less since it may have greater wear and tear, and a shorter lifespan due to use.
- Maintenance also impacts the resale value of a used car. If the car was well taken care of, it may depreciate at a slower rate than a car that was left in disrepair.
- Has your car been around the block? The number of people who’ve owned the car across its lifetime plays a role too… the more owners, the higher the depreciation can be.
- If the car has been in major accidents or experienced damage and underwent repairs from flooding, hail, and other natural causes, it adds to car depreciation.
- Reputation and reliability of the make and model of car that you own is a factor for the rate of depreciation. If the car is known to be reliable, its resale value can remain high for a long time. If your car is notorious for needing significant repairs as it gets older, the resale value won’t be worth nearly as much.
How can I minimize the way my car depreciates?
Buying a brand-new car is exciting. So shiny! So clean! And ah, that new car smell…
Unlike things like houses or wine, though, cars don’t gain value over time. Sorry to harsh your mellow here, but it’s just a fact: Purchasing a new vehicle from the dealership pretty much guarantees a drop in value as soon as the ink on your paperwork dries. The depreciation in the first year of owning the car averages around a whopping 20%.
Buying a used vehicle that’s at least five years old protects you most from the value of your car dropping significantly right away.
Choosing the right car is also important. Luxury cars like BMWs and Audis face significant depreciation in the first few years, while cars that are well-regarded, with high reliability scores—like Toyotas, Hondas and Subarus—don’t depreciate quite as fast, and hold their value for longer.
You can use a car depreciation calculator to determine how much value a brand new car will lose after you buy it, as well as the car depreciation rate.
Taking care of your used car, inside and out, helps your car hold value. This includes keeping a list of repairs and maintenance. In addition, don’t forget to clean your car.
Wear and staining on carpet and upholstery, scratches, rust, and damage to paint can speed up the way your car depreciates, so taking good care of it will help you resell it at a higher price. Nobody wants a used car that stinks of stale cigarette smoke, whose seats are covered with pizza stains. (Well, maybe somebody wants that, but that person is weird.)
Does my car depreciating impact car insurance claims?
Yes. If your car is declared a total loss in an accident, the amount it has depreciated will be really important. If your car is totaled, and the value of the car is less than your loan on it, you would be responsible for the difference. This would also be the case if you purchased a used car that’s depreciated faster than you can pay it off.
Let’s say you purchased a car that’s especially prone to depreciation. You get in a crash, and your vehicle is totaled. What happens when you file an insurance claim? Well, first be prepared to pay your deductible, of course. After that you’ll also be responsible for the difference between the car’s value at the time of the accident and any remaining balance on the loan.
Not to get too into the weeds, but bear with us: Let’s say you have $15,000 left on your car loan when you get into an accident that totals the vehicle. The value of the car, taking depreciation into account, is only $10,000. Your policy has a $500 deductible. Lemonade would reimburse you the value of your vehicle ($10,000) minus your deductible, leading to a payout of $9,500. You’d now have that cash in hand—but you still owe your lienholder the extra $5,500.
You can limit your financial exposure by paying a larger down payment when you purchase the car; by paying more than your minimum monthly payments to gain equity; or by purchasing gap insurance. If you have a trade-in that has value, that can be a way to increase your down payment as well.