How car depreciation affects the value of a car

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How car depreciation affects the value of a car

If you are looking to buy a new or used car, it’s important to consider the effects of depreciation before you buy the car. This article offers some insight into car depreciation and highlights key factors you should consider before buying your next car.

What is car depreciation?

Car depreciation can be defined as,

  • The rate at which a car loses its value over time.

Different car brands will have different rates of depreciation.

Why is depreciation important to consider?

  • Depreciation will cost you money over time,
  • Depreciation affects the re-sale value of a car.

*Tip: Reliable and well established car brands will generally have a lower rate of depreciation.

How does car depreciation affect you?

If you buy a new car, the moment you drive it, it will be worth a lot less than what you just paid for it. Here are some facts,

  • Depreciation is the largest expense you will incur over a five year car ownership period,
  • Most cars depreciate at a rate of 15% – 20% per year,
  • The rate of depreciation is most severe in the first year of ownership and can be as high as 50% in some cases,
  • The rate of depreciation decreases as the car gets older,
  • Your car will generally be worth half of what you paid for it after owning it for 5 years.

*Tip: To avoid the brunt of depreciation consider buying a used car with low mileage.

Example of car depreciation:

BMW is considered to be a luxury brand and holds a strong position in the market. The depreciation on a BMW is therefore generally considerably less when compared to other brands.

BMW 3 Series: (R363,052) Year 1 Year 2 Year 3 Year 4 Year 5
Value: R308,594 R268,476 R241,629 R219,882 R202,292
Depreciation %: 15% 13% 10% 9% 8%
Total Loss: R54,458 R40,118 R26,847 R17,590 R16,184

This table clearly demonstrates how a car loses value over time. Over 5 years, the total loss due to depreciation adds up to a staggering R 155 197. Let’s look at the factors that affect the rate of deprecation.

What factors will affect car depreciation?

Many factors influence the rate of depreciation for any given car. Here are some factors to take note of, especially if you plan on selling the car,

  • Make of the car – Reputable car brands with notable track records will hold value better over time.
  • Model of the car – Popular models will generally have a lower rate of depreciation.
  • Age of the car – New cars generally lose value faster than older cars.
  • Warranty period – If you sell a car that is still within its warranty period, the re-sale value will be higher.
  • Accident history – Cars that have been in accidents will have considerably lower re-sale values.

*Tip: Check this depreciation table to compare the depreciation of different car brands.

What can you do to minimize the effects of depreciation?

You can’t avoid car depreciation but you can minimize its effects. When buying a new car or used car consider the following,

  • Buy a car with neutral external colors such as black, white and silver. These colors will most likely still be popular in a couple of years and will therefore sell for more.
  • Buy a car with comfort and safety features such as central locking, alloy wheels, CD/MP3 player, navigation equipment, parking assistance, anti-lock braking system. Useful features improve re-sale value.
  • Buy a car that has good fuel economy.
  • Keep your car clean and well serviced. You will get better re-sale value if your car is well kept.
  • Try keeping your mileage as low as possible, this will increase the re-sale value of the car.
  • Park your car in a garage and consider buying a cover for protection. A well maintained car will sell for more.

Summary

Depreciation is inevitable. The most you can do is to buy a car that has a good reputation in the current market and maintain it to the best of your ability, that way you will get a better return when you decide to sell the car.

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