How And Why Do Cars Lose Value When You Drive Them Off The Lot

While buying a new car can be one of the best feelings out there, it is also one of the bigger investments in your life. But, cars cannot be considered as an investment because of the severe depreciation hit that starts right after you leave the showroom. Car depreciation can be explained as the difference in value when you buy the car and what it’s worth when you sell it off several years down the line. 

The biggest depreciation hit happens right after you buy the car. In most cases, the car will depreciate between 9-11% of its value the minute after you drive off the lot. Although a lot of it depends on the make and model of the car.

Generally, European models depreciate quicker than more reliable brands like Honda and Toyota, mostly because of the higher maintenance and service costs as the car ages. A Volkswagen Tiguan will more likely lose 40% of its total value once driven off the showroom. American brands retain their value and only face a 27% depreciation hit in the first 5 years, which is comparable to most Japanese brands, while luxury models like the BMW 7 Series, and Mercedes-Benz S-Class suffer the highest depreciation hit at 70%.

If we take a $30,000 car for reference, it will depreciate to $27,000 the moment you take it off the dealer lot. After a year, it will be down to $24,000 and continues to go down at a similar rate till year 5, after which it’ll be worth $12,530.  Fortunately, after the initial 5 years, the depreciation will start to level off, so if you keep your car for a long time, depreciation won’t matter that much. But, if you switch cars every few years, you’ll lose a lot of money with every car sold.

Before we get into the main reasons why cars depreciate and how you can keep their value, several websites like Kelley Blue Book and Edmunds will give you an idea of how much your car is worth after the depreciation hit.

“New” vs “Used” cars

Whenever a car transitions from “new” to “used”, it will suddenly lose a lot of value just because it isn’t new anymore compared to a showroom fresh example. In most cases, the depreciation hit will be 10% of the total value.

How many miles did you drive it?

Mileage is one of the key factors that will determine your car’s value along with age. The car’s odometer reading will generally determine the overall value of the car. On average, a car will run 15,000 miles every year, and crossing this limit will cause more depreciation, while staying under it may help retain value.

Of course, if we are considering high-performance models or sports cars, the 15,000-mile average is excessive and it will lose value a lot quicker if the annual running is high.

Luxury cars

While luxury cars give customers a comfortable and fun ownership experience, their values usually drip a lot faster than regular models. In the top 10 fastest depreciating models, almost all of them are luxury cars, particularly expensive models like the BMW 7 Series and Mercedes-Benz S-Class.

So, before you shell out a lot of money for a luxury car, keep depreciation in mind. On the flip side, regular models like the Honda Civic and Toyota RAV4 will hold their value well over the years, depreciating a lot less than luxury cars because of easy service and ownership costs.

Different body styles

Because of the sudden popularity of crossovers and SUVs, a recent study found that other body styles like sedans depreciate a lot more than usual. So, if you’re in the market for a car, opting for the most popular body style will go a long way to retain its value.

Features and options on offer

Unfortunately, even if you opt for all the options when buying a new car, it will depreciate just as quickly as a stock model. Because most used car buyers calculate from the base price and don’t consider features as a high priority.

The higher price you pay for an optioned-out car means the price has to fall further. However, basic features like power-adjustable seats and automatic climate control will help sway new buyers because of the convenience on offer.

 Fluctuating fuel prices

Because fuel prices will take a major chunk out of the total ownership costs, it will also determine the depreciation hit to a certain extent. When prices are low, gas-guzzling models like large SUVs and pickup trucks will be worth more than usual. In a similar sense, when the prices are high, economical models and hybrids will hold their value well. This is even more apparent in the modern age because customers can also choose from a variety of electric cars.

Electric cars

Unlike regular gas-powered cars, electric cars depreciate differently. Because of the high initial cost, electric cars have a huge depreciation hit right after you buy them. Since more and more technologies and advancements are being added to new models, the older ones get outdated and suffer further depreciation.

Accidental and other damages

No matter how well repairs are done, a car with an accident history will be worth a lot less when you trade it in. Buyers even look at minor accidents and dings when buying a used car, dropping the price further down. A clean report is always a priority in the used car market.

Rising demand

In some unique circumstances where demand exceeds the supply, cars will sell for a lot more than usual, suffering only a minor depreciation hit. This is more apparent in the modern market where, because of the pandemic, there is a shortage of new car supplies.

Demand for cars has also risen substantially for cars as people want to avoid public transport. The result is an upturned market where used cars are valued the same as new models, and in some cases even more.

So, if you’re buying a new car and want to calculate the depreciation hit, keep all these factors in mind before driving off the lot in your new vehicle.