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Depreciation can sometimes seem like an abstract concept, but it has a real effect on the value of your car.
Vehicle depreciation is the rate at which a car’s value declines over time. Paying attention to how a car loses its value is important for a few reasons.
When it’s time to sell or trade in your vehicle, depreciation affects how much cash you might be able to get. When you’re shopping for a car, having a sense of how quickly it can depreciate could help you decide whether to buy it. And if you finance your vehicle and have a long loan term, depreciation could put you in a situation where you owe more on your car loan than your vehicle is worth.
Wondering just how quickly a car depreciates or how you can find out? Let’s take a look at some ways you can estimate your car’s depreciation.
How much does a car depreciate each year?
Depreciation begins as soon as you drive off the dealership lot. A car can lose 20% or more of its original value within the first year. By the end of its fifth year, a car could have lost up to 60% of its original value.
You can use this information to get a rough idea of how your car will depreciate over time, but keep in mind that cars lose their value at different rates. Your car’s rate of depreciation depends on several factors.
1. Make and model
Some makes and models hold their value better than others. A 2020 study by the automotive research firm iSeeCars.com found that some trucks, SUVs and sports cars tend to have the lowest depreciation rates after five years, while electric vehicles and luxury sedans tend to lose their value more quickly.
Among the top 10 vehicles with the lowest depreciation, Toyota and Jeep accounted for five of the spots on the list. On the top 10 list for cars with the highest rates of depreciation, BMW accounted for three spots on the list.
In general, the more mileage a car has, the higher its rate of depreciation. For example, a car that racks up 100 miles on the odometer each day will generally depreciate at a higher rate than one of the same age that’s driven only 10 miles per day.
Is the car in “like-new” condition or does it look worse for wear? Generally speaking, a vehicle that’s in poor condition will face a greater loss in value than one that’s in pristine shape.
What’s the formula for depreciation?
To estimate how much value your car has lost, simply subtract the car’s current fair market value from its purchase price, minus any sales tax or fees. If you’re considering buying a car, look up the fair market value of older versions of the make and model to get a sense of the car’s value down the road.
You can find out a car’s estimated fair market value by using online tools offered by Kelley Blue Book, NADA Guides or Edmunds.
If you’re a Credit Karma member, you can use Credit Karma to get an estimate of your car’s current value.
Your car’s depreciation could have a significant impact on its value when it’s time to sell or trade it in.
To help minimize this impact, consider choosing a car with a likely high resale value. You can find out which cars have the best resale value by doing a little online research. For example, each year, Kelley Blue Book spotlights the cars that have the best resale value in a number of vehicle categories.
And since your car’s depreciation rate is linked to its overall condition, you can help maintain its value by providing diligent care. Keep its exterior and interior in good shape, and make sure it gets serviced regularly.
Finally, since high mileage can mean high depreciation, keep an eye on the odometer. If you’re traveling far and have a choice between a plane trip and a road trip, you can do your car’s value a solid by choosing to make the journey by air.