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What is car depreciation and how to avoid it

  • Parkers explains how to protect your car’s value
  • What to do if you’re buying or selling a car
  • Be careful what you buy and add the right options

Written by Graham King Published: 21 March 2024 Updated: 21 March 2024

It’s a fact of buying a new car that it loses value over time – a process known as depreciation. You lose 20% of its list price in VAT alone the second the dealer hands over the keys. Used cars aren’t immune from depreciation, either. It’s often the single biggest cost of owning a car, yet most people don’t actually think about it.

There are some cars that don’t depreciate or even appreciate – increase in value – but they are rare collectors’ items. In every other case, you just have to live with it. But there are ways you can minimise its impact, even if you can’t avoid it entirely.

In this guide, we’re going to explain what you can do to minimise your car’s depreciation or, to put it another way, maximise its value when the time comes to sell or part-exchange it for a new car. There are things you can do when buying a car in the first place, and while you own it. But first, let’s consider exactly what depreciation is.

Cars lined up in showroom - What is depreciation
In all but a very few cases, cars start depreciating – losing value – the second you take ownership.

What is depreciation?

Depreciation is the loss of value over time. Virtually everything you’ll ever buy depreciates to some extent. Everything from clothes to furniture, to electronics, to books and ornaments probably won’t be worth as much as you paid for it a few years down the line. The value that’s left is known as residual value.

So, why does depreciation happen? There are many factors involved. An item’s retail price includes taxes, transport costs and the profit margins of every company involved in producing and selling it. That’s all money that you never get back when you sell something on. An item’s condition is also a factor, as is its reputation in the market and whether it has been rendered obsolete by new technology or changing fashions.

Cars are just as susceptible to these factors as any other consumer good, perhaps more so. Car depreciation is also more obvious because the numbers involved are so much bigger. Many cars can depreciate by 50% or more in just a couple of years, which could translate to tens of thousands of pounds of lost value.

Now that we’ve covered what depreciation is, let’s get into how you can minimise your car’s depreciation and maximise its value.

Renault cars lined up on dealer forecourt - What is depreciation
Many factors determine a car’s depreciation including its popularity and reliability.

Buy the right car

This is by far the important factor in minimising depreciation. Different cars depreciate at different rates and choosing the right car with a lower rate of depreciation – sometimes referred as a higher residual value – could save you a big pile of money in the long run.

It often isn’t obvious which cars have low rates of depreciation and, conversely, which ones have high rates. For instance, cheap cars such as Dacias often have quite low depreciation but expensive, apparently desirable luxury saloons such as the Mercedes S-Class are usually catastrophically bad for it.

So, when you’re shopping for a new or used car, studying the depreciation rates of the options on your shortlist should inform your decision. It could be the one with the lowest rate isn’t your preferred choice, but it could well be the most cost effective.

It can also help to keep an eye on the news. For instance, there have recently been many stories about the low residual values of electric cars.

On the flip side, studying depreciation rates can help you pick up a real bargain if you’re looking for a used car that you intend to keep for a long time.

BMW 830d Convertible - What is depreciation
Perhaps counterintuitively, luxury cars are among the worst for depreciation.

Choose the right specification for your car

Even within a single car’s model range, depreciation rates can vary significantly. High-spec models usually have lower rates than entry-level models, for instance. Petrol engines might depreciate less than diesels.

Your choice of colours and wheels can have an impact, as well. Other options such as an upgraded infotainment system or heated seats probably won’t bump up the residual value but can make a car easier to sell second-hand.

Audi RS3 Saloon - What is depreciation
Cars might look good in bright, bold colours but they can negatively affect depreciation.

Have your car serviced regularly

Keeping on top of your car’s servicing schedule and dealing with any random issues that come up – such as recalls and component failures – help to maximise its value when the time comes to move it on.

To that end, it’s important to keep the car’s service history fully up to date. That means making sure the service book or digital service record is properly filled out every time it goes in for routine servicing. Also keep a file of receipts and invoices for the work carried out.

With all that evidence, a buyer can be confident that the car has been properly looked after. As such, they’ll be prepared to pay a higher price for it than they would for the same car with little or even no history.

Mechanic servicing car on lift - What is depreciation
Having your car serviced regularly helps maximise its value.

Keep your car clean and tidy

Cleaning your car can be a pain, but doing so can help maximise its value. Washing your car stops dirt becoming ingrained in the paintwork. Similarly, dirt can start to clog up the carpets, seat upholstery and all sorts of nooks and crannies if you don’t vacuum out the interior.

A car that isn’t regularly cleaned can start to look shabby pretty quickly, and it’ll be worth less than a car that’s been kept spick and span. Buyers also tend to question how well a shabby-looking car has been maintained, which also makes it harder to sell.

Pressure washing Hyundai Tucson - What is depreciation
Shabby-looking cars are generally worth less than ones that have been kept spick and span.

Keep the mileage down

There’s a perception that a car with high mileage is going to be less reliable, therefore it’ll be worth less than the same car with low mileage. Doing too few miles can cause reliability issues, as well, but that fact isn’t widely recognised among buyers.

There’s a happy medium, though. Around 8,000 to 10,000 miles per year is sufficient to keep your car healthy and won’t unduly impact its second-hand value. But don’t let concerns about depreciation stop you using your car as much as you need to.

Man driving BMW - What is depreciation
Cars with high mileage are generally worth less than those with lower miles.


How much does a car depreciate per year?

For the vast majority of cars, their rate of depreciation starts quite steep and gradually levels out once it’s past about five years old. Essentially because, by that point, the car has less value to lose. In theory, at least, most cars continue depreciating until they’re effective worthless and are scrapped.

Because every car depreciates at a different rate from a different list price, we have to look at averages per year. In the UK, most cars lose about 15-20 percent of their value in the first year, and 40-50 percent by the time they’re three years old.

Ford Kuga line-up - What is depreciaton
There are no hard and fast rules about which cars depreciate at what rates.

How do you slow down depreciation?

A car’s depreciation rate is calculated before it even goes on sale. There are several organisations that do the calculations, but CAP is the industry standard. A huge range of factors is considered including the car’s position in the market, the reputation of its manufacturer and its likely reliability.

Depreciation has to be calculated up front because it determines monthly payments for leasing and personal contract purchase (PCP) deals. With such deals, you’re effectively paying the cost of the car’s depreciation until it’s returned to the lender and sold off.

Because rates are essentially predetermined, you can’t do much to slow down depreciation. However, if you follow the tips covered earlier in this article, you can ensure that your car achieves the best possible price when the time comes to sell it on.

New cars parked up - What is depreciation
Looking after your car properly with regular servicing and cleaning will maximise its value.

Why is my car depreciating so much?

If you’ve bought a used car in the last couple of years, you may have noticed that its value has dropped much more than you might have expected. Indeed, some buyers who acquired their car with a personal loan or a hire purchase (HP) deal may now find themselves in negative equity.

Why has that happened? In the couple of years after the COVID-19 pandemic, car manufacturers were struggling to meet demand for brand new cars. That meant delivery times got longer and rather erratic, which sent many buyers looking for a used car instead and the increased demand sent prices skyrocketing. The supply issues for new cars have now largely been resolved and demand for used cars has gone down as a result. That, in turn, has lowered prices. If you bought a used car when prices were at their highest, you may want to get a valuation for it to see exactly where you stand.

Toyota cars on dealer forecourt - What is depreciation
Supply and demand issues mean some used cars have depreciated more than owners might expect.