Last month’s blog about cars that lose their value prompted a lot of interest. The main factor behind cars losing their value is depreciation. In fact, the biggest cost for motorists after fuel purchase is depreciation. CAP Automotive undertook research and found that deprecation costs the average motorists three times as much as they spend on petrol.
What exactly is depreciation?
Simply put, it is the difference between the amount you spent when you bought the car and the amount that you get back when you sell or trade it in. On average a new car will have a residual value of around 40% of its price when bought new after three years. This assumes that the mileage is about 10,000 miles each year. So the average car loses 20% of its value in each year during the first three years that you have it. A new car loses value (depreciates) as soon as you drive it away and can lose between 10% and 40% of its value during the first year.
Many people don’t think about depreciation when they buy a new car but they should bear it in mind as some cars depreciate much quicker than others. For instance, if you buy a small cheap car for about £10,000 then it may lose about £2,000 per year and after three years be worth £4,000. However, an expensive luxury car could cost £50,000 to buy and the depreciation could be £10,000 per year so after three years it is worth £20,000.
There are other factors involved as depreciation can be affected by condition, mileage and variation in models. So a more expensive car could have better residuals and cost less overall than a cheaper car which loses much more value. Brand new models can depreciate more slowly than others. More fuel efficient cars also tend to depreciate more slowly as these cars are cheaper to run so the demand is high. A long waiting list may also indicate that the car is in big demand so will hold its value longer.
Rather than buy brand new think about buying nearly new as a one or two year old car is better value than a brand new one as the price has already dropped. Five year old cars can be a good investment, frequently loan free, and a good deal if you don’t mind not having the latest features and will be doing low mileage. Cars aged about 8 years old are worth thinking about as by this time the car has pretty much done all the depreciating it’s going to do. However, by this time the mileage could be high and repair bills could creep up due to the age of the vehicle.
How to minimise depreciation
There are some things you can do to help your vehicle maintain its value:
- Buy nearly new or used cars to avoid the steepest falls in depreciation.
- Keep the mileage down. Average mileage is about 10,000 a year.
- Keep the car in good and clean condition.
- Ensure that services are done and recorded in the service record so there is a full service history.
- Sell at the right time – the right time of year (i.e. summer for convertibles) and before any replacement models hit the showrooms.
- Always get repairs done fully and promptly.
- Keep away from modifications like spoilers and flared wheel arches.
- Choose a car with a neutral or popular colour as that will also help its re-saleability.
- Select a manufacturer known for its reliability.
- Avoid big luxury cars which have a tendency to depreciate more than smaller cars as they are more costly to run and repair.
- Buy a car that has fuel economy as it will be cheaper to run and will cost less in tax as well.
Car valuation service, Glass published a study in April 2015 on how well cars hold their value. These were the top ten cars.
- Land Rover 20.3%
- Tesla 28.5%
- Maserati 29.8%
- Audi 31.1%
- MINI 31.3%
- Jeep 31.7%
- Lexus 33.0%
- Dacia 33.6%
- Mitsubishi 34.0%
- Mazda 34.2%
As you can see from the list the more premium brands fare better than your average makes, like VW, Ford and Vauxhall. To find out more about calculating depreciation click here.