What is car depreciation and some tips to minimize it
Worried that your car is worth less before you even drive it off the lot? Learn more about how car depreciation works.
According to Ramsey, a new car’s value decreases 9–11% as soon as it’s driven off the dealership lot — dropping about 20% in the first year, and approximately 60% in the first five years. Learn more about depreciation of cars and tips to minimize it, and check out our car depreciation calculator.
What is car depreciation?
According to Ramsey, depreciation is the difference between how much your car was worth when you bought it and what it’s worth when you sell it. Several things can affect the rate of depreciation. Any changes to mileage, condition, reputation and consumer preferences may affect the vehicle’s value.
Some tips to reduce depreciation of cars
- Maintain your car - Chances are, you’ll get better resale value if you’re able to keep your vehicle in good shape — inside and out. Also, follow the recommended maintenance schedule for your vehicle and keep records of the work. Avoid modifications — such as window lettering — that may make a car more difficult to sell.
- Have low mileage on your car - Driving a typical, or less-than-average number of miles per year, can slow the depreciation. Vehicles with higher miles depreciate faster than those with low miles.
- Buy a high-resale model - Some cars hold their value better than others. By researching resale values before you buy, you can avoid vehicles that get hit hardest by car depreciation. Both Kelley Blue Book and Edmunds provide resale values on any given car in previous years. You can use that information to help you determine what future value may be on a particular model. Additionally, each year Kelly Blue Book publishes a list of the 10 cars with the best resale value.
- Consider a used car - The depreciation rate is faster for new cars than used cars. Typically, depreciation happens at a rate of 20% the first year, plus another 10% for every year after that, up to five years — effectively meaning that vehicles may lose more than 40% of value in that time span. Translation: If you buy a three-year-old car, someone else has effectively “paid” the bulk of the depreciation for you.
- Drive your car a really long time - There's an old saying that the stock market is like a roller coaster: You only get hurt if you jump off. The same is true of car depreciation. Since depreciation only hits you when you sell, you'll feel the effect less if you keep driving the same car for years after it has lost most of its initial value. Once you've decided to purchase a different vehicle, you can also plan the best time to buy.
- Review possible tax write-offs - If you use your car for a business (even a side business), you may be able to deduct a portion of your car's depreciation on your income taxes over five years. Consult your tax advisor for details.
- Sell it yourself - Ultimately, depreciation is a simple math problem: [purchase price] – [sale price] = [depreciation]. The more you get for your car when you sell it, the less you lose in depreciation. In general, you may get more through a private sale than a trade-in.