If you’ve been scrutinizing your budget lately, and considering ways to save money, your monthly car payment is probably an expense you’d be happy to shrink. Fortunately, there are options available to drivers seeking to rein in the cost of car ownership without letting go of their ride. Loan modification is one approach to a…
Your brand new car starts to lose its value the moment you drive off the lot. So what does that mean for you?
Whether you’re driving a car, SUV, or pickup truck, there’s one thing you can count on — your vehicle’s value depreciating. Unless you’re driving a vintage car, your four wheels are probably not going to increase in resale value anytime soon.
CARFAX reports cars can lose more than 10% of their value in their first month alone, and 20% after the first year. According to the 2019 Black Book-Fitch Ratings Vehicle Depreciation Report, the average annual depreciation rate was 12.5% between 2011 and 2018.
Depreciation impacts car values differently, depending on a variety of factors, such as make, model, mileage, and accident history. So, depreciation isn’t a simple or universal percentage that you can knock off your car’s retail price.
Depreciation plays a role in several common situations. It can make a difference when you’re trying to sell your car for profit, collect a check from your car insurance company after totaling a car, and apply for car loan refinancing.
Here’s what every car buyer needs to know about car depreciation.
What Is Car Depreciation?
Car depreciation measures the drop in value of a vehicle over time. So, if you purchased a new vehicle three years ago for $20,000 and it’s worth $14,000 today, your car value depreciated by $6,000 — or 30%.
As your car ages, the miles on the odometer keep ticking, and dings and scratches take a toll on your car’s exterior. All of these factors — and more — impact the resale value of your car.
Let’s walk through each factor.
Modern cars are lasting longer. Back in 2000, the average age of all cars on the road was between eight and nine years. Today, that average has climbed to 11 years. However, the majority of Americans like shiny new cars.
Most of the time, the resale value of an older car will be less than a newer car. The older the car, the higher the depreciation.
Age and mileage go hand in hand. The more miles your car has, the more wear and tear. And more wear and tear leads to more depreciation. If you have higher-than-average miles on your odometer, you can expect the rate of depreciation to also be higher.
Vehicle make, model, and year
In terms of depreciation, not all vehicles are created equal. The make, model, and model year of your car impact how quickly it loses value. Why? There are several factors in play.
- Consumer preferences
- Brand reputations
- Supply and demand
For instance, consumer preferences and brand reputations will impact car value. If a particular brand is known to have expensive maintenance, it might be less desirable in the eyes of a consumer.
On top of that, if consumer demand for a particular vehicle model is outpacing supply, that model will be more valuable.
If you take care of your car — cosmetically and mechanically — it has a better chance of retaining value. Cars with performance problems, interior defects, and door digs will depreciate far quicker than well-maintained cars.
Think of it another way, would you rather buy a car in pristine condition or one that’s covered in dents?
Accidents, especially major ones with structural damage, will take a chunk out of a car’s worth. According to CARFAX, the average accident results in a $500 hit to a car’s retail price. If the vehicle has a history of severe damage, that figure jumps to $2,100. In other words, safe driving pays off in more ways than one.
As you can see, multiple factors contribute to car depreciation. But how exactly is it calculated?
How Is Car Depreciation Calculated?
The average annual depreciation rate is just that — an average. It’s not an appropriate benchmark for every vehicle.
So, how much has your car depreciated?
Start by determining your car’s current fair market value. In other words, what price could you realistically charge for your car? You can find reliable information on sites like Kelley Blue Book, Edmunds, and NADAGuides.
Next, subtract the fair market value from your car’s original purchase price. The remainder represents an estimation of your car’s depreciation.
You can also leverage the CARFAX History-Based Value tool to estimate how much a vehicle has depreciated.
If you’re in the market for a new car, you can calculate a rough estimate of its future depreciation rate. Find out the current fair market value of an older version of a particular model and compare that to its initial release price. It’s not an exact science, but it helps give you an idea.
Which Vehicles Hold Their Value?
According to the 2019 Black Book-Fitch Ratings Vehicle Depreciation Report, compact vans and sub-compact crossovers had the lowest depreciation rates in 2018 at 5.1% and 5.5%, respectively.
But, if you’re curious about specific makes and models, iSeeCars.com, an automotive research firm, assessed vehicle depreciation rates over a five-year period. The Jeep Wrangler (the base model and Unlimited version) rests atop the rankings with a rate of 27.3%. Compare that to the average for all vehicles, 50.2%, and it’s a pretty eye-opening figure.
Aside from the Wrangler, pickup trucks also tend to retain their value. Trucks accounted for six of the ten lowest rates.
Which Vehicles Depreciate the Fastest?
Lofty sticker prices don’t necessarily indicate long-term value. Per the same depreciation report, luxury car values declined the fastest in 2018 with a depreciation rate of 18.5%.
In addition, electric vehicles also tend to depreciate quickly. According to the iSeeCars.com research, the Nissan LEAF and Chevrolet Volt both lost over 70% of their values over a five-year stretch.
At this point, you might be wondering if there’s anything you can do to counter depreciation rates.
Can I Stop or Prevent My Car From Depreciating?
For standard vehicles, you can’t stop depreciation altogether. Even if you rarely drive your car, it’s still aging and, in turn, depreciating. But there are some steps you can take to slow depreciation down.
Buy a high-quality, used car
New cars depreciate much faster than used vehicles. So, if you’re worried about depreciation, look for a used model of a reputable brand. Check for lower mileage and a reliable previous owner.
Remember, accident history and condition impact a car’s value. If the previous owner was a safe driver and regularly serviced the vehicle, it has a better chance of maintaining its value.
Limit mileage when possible
For many people, driving is a necessity. Whether it’s commuting to work, running errands, or taking road trips, a car is integral to the typical lifestyle. But that doesn’t mean you can’t limit your annual mileage to help retain your car’s value.
For example, if you’re an avid fan of road trips, consider renting a car to keep your mileage down. Or, if you drive to work and happen to live near a coworker, you could set up a carpool system to cut your car’s usage.
Take care of your car
Regular vehicle maintenance is vital to your car’s longevity. Keep to a servicing schedule. Listen to dashboard alerts. No one likes paying mechanic bills, but maintenance preserves the value of your vehicle — and prevents larger expenses down the road.
You can also protect your vehicle outside of the service shop. Door dings, scratches, stained interiors — these things are common occurrences for the typical driver, but they add up. Taking extra precautions to keep your car in mint condition, inside and out, will go a long way in terms of slowing down its depreciation.
You might have to walk a little further, but parking away from other cars can prevent accidental door dings. Keeping your car garaged can help keep your paint in good shape — or even avoid something out of your control like hail damage.
How Does My Car’s Depreciation Affect Auto Loan Refinancing?
Since depreciation affects car value, it can impact your ability to refinance your auto loan. Your loan-to-value ratio (LTV) is a major factor in the refinance process.
For an auto loan, your LTV would be the amount of your loan relative to the value of your car. Generally speaking, lenders prefer to see an LTV of 100% or lower — but some lenders will approve refinance loans with LTVs up to 130%.
Car (LTV) Loan-to-Value Calculator
What does this have to do with deprecation? Consider the value of your car a year or two after you purchase it. If your car depreciates faster than you’re paying off your loan, you could be upside down before you know it (i.e. the balance of an auto loan is higher than the car value).
For example, let’s say you get a $20,000 loan to finance the purchase of a car of the same value. For whatever reason, your car depreciates to $15,000 after a year — but you’ve only paid off $2,000 of the loan. Your LTV would be 120%.
You might have a harder time refinancing an auto loan if your car’s value sinks too far below the loan balance.
One Last Thought
Car depreciation is inevitable. But that doesn’t mean you shouldn’t take care of your car. Follow a maintenance schedule, practice safe driving, and garage your vehicle if possible. Small steps can boost the potential resale value or increase your odds of getting a refinance loan.