A new car loses around 10% of its value the minute it drives off the showroom floor, and continues to depreciate the more time it spends on the road.
Three main components affect the rate at which a new car depreciates. The first is its age and the second is mileage, with higher numbers generally translating to a lower residual value.
The third is transaction costs, which is described as the difference in trade/wholesale and retail prices. When selling your car to a dealer you will receive the trade/wholesale price, and when buying a car, you pay the retail price.
These elements accounted for, a new car will have lost in value:
- After one minute – Around 10%
- After one year – Around 15% to 20%
- After five years – Around 30% to 40%
It should be noted that these are drops in retail value, with the transaction cost adding a further 10% or so to the total depreciation, as per Mark Ridgway, Chief Technical Officer of car pricing experts getWorth.
Fending off depreciation
It is impossible to avoid depreciation on the vast majority of cars, however, you can make smart choices that will see your wheels lose less value than the industry average.
Residual value is determined by its original price point and the class of vehicle. For example, an affordable entry-level car will hold its value better than an expensive ride from a high-end brand.
Additionally, in-demand models tend to depreciate slower than less popular ones, as do vehicles from manufacturers that have built up a good reputation over time, such as Toyota.
Fuel economy is another important element to consider, as cars that are known for their frugality usually enjoy higher demand, which in turn supports their market value.
Once you have considered these factors, it’s also important to make sure you don’t overpay for the vehicle.
“If you are buying a new car, look at the prices of the one-year-olds in the market so you have an idea how much value that model might lose,” said Ridgway.
“Even for a used car, compare prices. If you pay above the market price, you won’t recover the difference. With a used car, you also need to pay attention to quality and condition.”
Finally, limiting mileage wherever possible, combined with regular maintenance, will ensure you receive the highest possible price for your wheels.
“A car with above-average wear is less desirable in the used market, and mechanically unsound cars are a no-no,” concludes Ridgway.
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