What is vehicle depreciation?

Depreciation is a word you've probably heard in relation to both new and used cars, but how important is it? In short, depreciation is the loss in value of a car over time, and it can have a big impact on your finances whether you're buying, selling, or renting a new or used car. Here is our guide to car depreciation.

What does depreciation mean?

Depreciation is the loss of value over time. This happens with most things you buy - clothing, electronics, furniture, and most other consumer products. Depreciation is an ongoing process, but you usually only realize it when you plan to sell something you own to someone else. 

Even after a fairly short amount of time, the value of an item will usually go down from the price you paid when it was new. This fall is the depreciation of the item. In most cases, the depreciation process continues over time until the item becomes of little or no value. How quickly this process occurs is called the depreciation rate.

What causes depreciation?

There are many factors that cause the depreciation of an item. Electronics depreciate as technology improves. Clothes depreciate as fashion changes. These factors, along with many others, also cause your vehicle's value to drop.

The popularity of a car, its reliability, efficiency, and maintenance costs all affect its depreciation rate. Different cars depreciate at different rates depending on how much they are affected by these factors.

Some things are out of your control, but there are others that you, as a car owner, can influence. Just using the car leads to depreciation. The more miles you drive, the less your car will be worth as components wear out over time.

Another factor that can seriously affect the value of a car, especially a new one, is taxes. All new cars are subject to VAT at a rate of 20 percent, adding thousands of pounds to the price. And there may be other fees that the car manufacturer and dealer add on top. In most cases, the amount of VAT and any additional costs you have paid are immediately deducted from the value of the new car as soon as you take ownership of it.

Fortunately, when it comes to most used cars, there is no VAT, although dealers add their costs to the asking price. Fortunately, this is usually a very small amount.

How is depreciation calculated?

A new car's depreciation rate is often quoted as a percentage showing how much value will be lost during the first three years of its life. You can use this percentage to determine how much the car will be worth when it is three years old. Here is an example:

A new car that costs £20,000 new and depreciates by 50% will cost £10,000 in three years.

Depreciation rates are sometimes quoted in terms of "residual value". In the example above, the car has a residual value of 50%. This means that after the first three years it is worth 50% of what it was worth in new condition.

The depreciation rate of a car decreases over time as its value decreases. Cars depreciate the most in the first year, due in large part to the taxes and fees mentioned. After 10 years, the depreciation rate may drop to 1-2% per year.

Depreciation rates are estimated even before the car goes on sale. Automotive industry experts analyze how the car will be affected by the factors we mentioned earlier and calculate the depreciation rate accordingly. They don't always get it right, but the numbers they get are extremely important. 

Why does depreciation matter?

Studying the depreciation rate is helpful when buying a used car because you can find the real deal. It's amazing how much some cars lose value in the first few years of their lives, which can make them a fantastic value when buying used cars.

Conversely, you don't want to be the first owner of a car that will lose tens of thousands of pounds in value by the time you come to sell it. Learning about depreciation rates can help you avoid this trap.

Depreciation rates also determine the cost of acquiring a car on lease or under a personal contract purchase agreement (PCP). Car leasing rates and PCP costs are based on the predicted value of the car at expiration. Basically, your lender tells you the guaranteed future value of your car, and your monthly payments cover the cost of depreciation for as long as you own it.

Learn more about PCP car financing here.

Which cars are the least expensive?

There is no hard and fast rule about what type of car loses the least value. In general, however, popular cars tend to lose relatively little in value. This is a simple case of supply and demand. Large SUVs like the BMW X5 are very trendy and many of them have low damping rates. Like most electric vehicles.

It is worth noting that very few cars lose less than 50% of their value within the first three years. And anything up to 60% can be considered a pretty good income.

There are some exceptions to the rules. Some cars actually increase in value over time, which means they are worth more when you sell them than when you buy them. This is the case with many classic cars, some rare sports cars, and even some nearly new electric cars.

BMW X5

Which cars depreciate the most?

There is no hard and fast rule about which cars depreciate the most. Again, the popularity of the car is a good predictor. For example, large sedans and minivans have fallen out of favor in recent years and may have high depreciation rates. Similarly, some popular models have high depreciation rates because there are many used ones on the market. Many luxury cars have high depreciation rates because they can be expensive to maintain as they age.

How to minimize depreciation?

The best place to start is by buying a car with a low depreciation rate. Other things you can do include keeping your mileage to a minimum and keeping your car in good condition. Cars that have been properly cared for retain their value longer.

However, you shouldn't let worries about future value dictate what car you buy and how you use it. You should always buy the car you like and use it the way you want.

Want to sell your car and don't know how much it costs? Use our free car valuation calculator to get an instant quote.

There are many high quality used cars for sale on Cazoo. Use our search feature to find what you like, buy it online and then have it delivered to your door, or choose to pick it up from your nearest Cazoo customer service center.

We are constantly updating and expanding our range. If you can't find one today, check back later to see what's available. Or set up a stock alert to be the first to know when we have vehicles that match your needs.