What is depreciation?

We look at what depreciation actually is, what affects it, and how it affects you?

When you are looking at getting a new car, regardless of how, you would have probably heard the word depreciation at least once.

But, what is depreciation? And how does this affect you?

In this article, we take a look at everything you need to know about depreciation.

What is depreciation?

When talking about cars, depreciation is essentially the difference between the value of your car when you buy it, and how much it’s worth when you come to reselling it. This can vary between makes and models, but the general rule is that a car loses between 15-33% of its value in the first year and up to 50% or more over three years.

Depreciation vs. Residual value; what’s the difference?

When you talk about depreciation, residual value will pop up at some point. While the two are linked, they aren’t the same.

If you are leasing then the residual value will be of concern to you. This is because the residual value is how much your car is worth at the end of your lease contract and is used to help calculate your lease car payments. Residual value is also important on a personal contract purchase as it contributes to the Minimum Guaranteed Future Value (MGFV) which you can read more about here. 

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What affects depreciation?

There are a number of things that affect depreciation. Some of these are external factors, but there are things that you can do to lower the amount of depreciation.

what is depreciation
  • Reliability
    • The more  unreliable the car is, the more it’s going to lose its value
  • Mileage
    • Mileage is a huge factor when it comes to depreciation. The average amount of miles is 10,000 a year, so any more than that and your car will depreciate quicker than average.
  • Warranty
    • Three years is pretty standard for a car these days, but there are some manufacturers, such as Kia, that are offering much longer. This will help when it comes to reselling, particularly as the warranty will transfer to the new owner.
  • Condition of the car
    • Keeping your car in good condition helps the car hold its value better, if there is any external or internal damage then this will damage the value
  • Efficiency
    • Cars that are efficient, and get good miles to the gallon are more appealing and therefore hold their value better than gas guzzlers. This is why diesel cars tend to hold their value more than petrol, though this is becoming less true as more petrol cars are becoming more efficient.
  • The number of owners
    • The more owners the car has had, the less it will be worth
  • Popularity
    • Models tend to be updated, or have a ‘face lift’, so the more current your car the more valuable it will be. Alternatively, if it’s an old model then it won’t be as desirable and therefore will not be worth as much.
  • Service history
    • Getting your car serviced regularly will ensure that your car holds as much of its value as it can. This is a great opportunity to ensure that your car is in top shape.
  • Make and model
  • Reputation
    • Nothing like an emissions scandal to lower the value of your models.

What are the best cars for depreciation?

So we know what affects depreciation, so which cars are the best for holding their value?

According to Carbuyer, these are the top cars for holding their value (plus the average annual rate of depreciation)

So if you want a car that will hold its value, you should take a look at some of these models. 

How can I minimise depreciation?

Okay, so we know what affects depreciation, and which brands are best for holding their value, what can you do to minimise the depreciation on your car?

  • Keep your mileage down
    • Quite an obvious one, and sometimes it can’t be helped, but keeping to a lower mileage will ensure that your car doesn’t lose its value quicker than the normal rate.
  • Keep your car in good condition
    • Another quite obvious one, but ensuring that your car is serviced regularly and getting any damage fixed quickly will keep the value of your car. Also, make sure you keep all your servicing records and documents in one place.
  • Think about the best time to sell your car
    • You probably aren’t going to get much if you sell your convertible in winter, or your 4×4 in July.
  • Popular colours are your best friend
    • You may really like that bright green car, but a lot of people won’t when it comes to re-selling.
  • Think about the additional extras
    • Some add value to your car, such as sat-navs and air con or metallic paint and leather seats.

So, depreciation is essentially how much value your car loses from the time of purchase to the point of reselling. Some cars depreciate quicker than others, and there are things that you can do to minimise the deprecation, but it is something that happens to all cars. The best thing you can do is to ensure that your car is kept in good condition and is serviced regularly.

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Andrew Kirkley
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  • 12th December 2016

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