Chances are, you probably know what car depreciation is and the steps you can take to reduce it. If you've done your research, you might even know the exact rate at which your car is going to depreciate.
Or if you don't know any of the above, then not to worry, as we're here to explain it all for you in simple, plain English.
But most importantly, did you know that when leasing (as opposed to buying or PCP), you don't have to worry about car depreciation at all?
You see, the great thing about leasing is that you simply take out a car, enjoy it, then hand it back without the hassle of selling it on or having to worry about how much it's now worth.
Let's dive straight into the topic.
What is Car Depreciation?
In a nutshell, it's the rate at which your car loses value overtime.
Or to put it another way, it's the difference between what your car is worth at the time when you get it (whether through PCP, a lease, or outright cash), and what it could be worth further down the line. It's normally expressed as a percentage, e.g. you might expect your new BMW to depreciate 20-25% over the first two years.
In the context of leasing, you might have heard depreciation being referred to as residual value. And that's just a fancy way of saying what your vehicle will be worth at the end of the leasing period, with the car's depreciation fully taken into account by the leasing company from whom you have leased the vehicle.
How Does Car Depreciation Work?
Unfortunately, cars aren't like houses. They're less durable and tend to drop rather than increase in value overtime.
It's a simple case of economics: bumps, scratches, weather effects, mileage, wear and tear, and the release of new models are all going to take their toll throughout the years of a car's use, meaning that it's inevitably going to be worth less than at the time when it was first produced.
In fact, the urban legend is true: a new does car lose value as soon as you drive it off the showroom forecourt. It's brand new and pristine, but the mere fact of it being driven for the first time is enough to kickstart the slow, costly process of depreciation.
And unless you're driving an insane amount of miles, depreciation is actually going to outpace fuel as your biggest day-to-day car running expense. That's according to research by CAP Automotive, who found that depreciation will cost the typical car owner three times as much as they spend at the petrol pump!
How Much Does a Car Depreciate Annually?
The biggest drop in value occurs in the first year, after which the process is going to slow down.
Generally, your car will lose around 15-35% of its value in the first 12 months, before going on to depreciate by around 50% by the third year. To make the numbers easier for you, here's a neat summarisation of the rate of depreciation (assuming you're covering roughly 10,000 miles per annum):
- Year 1: 15-35% depreciation
- Year 3: 40-60% depreciation
- Year 5: 60-70% depreciation
- Year 8-10: 80% depreciation
By the five-year point, the car’s depreciation will tend to become slower and more steady, and by the eight-to-ten-year point, it may have run its course and will stop depreciating completely.
However, it's worth nothing that the average car depreciation can vary between models and manufacturers. For example, an Audi could depreciate by 40% on average over the course of its first three years, whereas a Porsche might only depreciate by 25% over the same period of time. Larger, less fuel-efficient cars tend to suffer here, but the rate of depreciation can also depend on condition and the year of the model.
So although bragging rights and a sense of freshness often come with being able to get behind the wheel of a new car, buying used can often make more sense financially. If you buy a car that's three or four years old, it will already have gone through its biggest phase of depreciation, meaning you'll have lost less money when you then go on to sell it.
What Factors Affect Depreciation?
Quite a few. Here's a rundown of the main ones.
Mileage: It's a fairly simple equation. The more mileage your car has on the clock, the less it's going to be worth. Just bear in mind that the average UK annual mileage rate is around 8,000 to 12,000 miles, so anything above that and you're entering a kind of 'danger zone'.
Previous owners: A car that's been through a lot of owners could mean a lot of potential issues and mechanical faults. Plus, not everyone can be trusted to look after a car properly (sad fact, we know!).
Size and cost: Smaller vehicles in the form of city cars and superminis (think the Mini Hatch or the Renault Zoe) are fuel efficient and cheap to run, resulting in a relatively slow rate of depreciation. On the opposite end of the scale, you've got luxury cars like the Mercedes-Benz SL or larger ones like the Citroen SpaceToruer. These not only cost more in the first place, but they also go through more fuel, parts, and maintenance.
Brand and model reliability: If you're after a car that has a reputation for breaking down, expect it to have a higher depreciation rate due to lower demand because of that, and a limited number of potential drivers looking to take the risk with one.
Fuel economy: Smaller, more fuel-efficient cars have a tendency to depreciate less. That's because they cost less to run and appeal to a large range of people, keeping demand nice and high.
Road tax: Less pollutive cars (electric, we're looking at you!) will cost you less to tax each year, making them more appealing to drivers.
Track Your Car's Value
At the end of the day, a car is an asset, and like with any asset, it makes sense to track its value overtime. Luckily, you can do just that at the click of a button through various online value trackers.
Just bear in mind that the results which you get are intended as a base guideline, because the real-world depreciation of a car can vary. That being said, these car depreciation calculators are still a very useful way to get an approximate estimation. Most UK car depreciation calculators:
Include your car's mileage
Include MOT results
Use data from the DVLA (Driver and Vehicle Licensing Agency)
Use sales information from sales records, trade industry data or private databases
Let you enter your numberplate to improve your valuation's accuracy
Although there's usually a clear pattern to car depreciation, that isn't always the case, so getting regular updates can give you a clearer insight into when your car’s value might be dropping or increasing in tune with the ebb and flow of the market.
How Can I Reduce My Car's Depreciation?
Of course, nothing is going to stop or reverse the process of depreciation entirely, but there are a few practical things which you can always do to slow it down, no matter what kind of car you're driving. In addition, you'll help your fuel efficiency as well and reduce your carbon footprint.
Maintaining your car in accordance with the manufacturer recommendations
- Avoiding any MOT failures
- Keeping your mileage as low as possible
- Keeping hold of all service records and receipts
- Repairing damage using parts recommended by your manufacturer
- Keeping it clean and well-looked after
- Avoiding smoking or transporting pets
- Avoiding or removing modifications e.g. spoilers or wheel arches
- Do your research into a car and make beforehand to work out any patterns in value depreciation
- Stick to popular, more neutral colours like grey or black, as 'bright' or 'strong' colours like red or purple can either be a hit or a miss
What are the Slowest Depreciating Cars in the UK?
With the exception of classic cars (think the Delorean from Back to the Future), pretty much every vehicle falls in value, but some do so faster than others. These are typically ones that belong to French or Italian manufacturers, and it's mainly due to poor reliability.
The ones that depreciate the slowest are generally either strong brands or offer iconic prestige or great reliability. But above all, it's because they are popular and in high demand. A lot of high-end sports vehicles tick these boxes, as well as 4x4s and SUVs, as you'll see below.
- Lamborghini Urus
- Toyota Land Cruiser
- Porsche Cayman
- Porsche Cayenne
- Volkswagen T-roc
- Porsche Boxster
- Range Rover Sport
- Nissan GT-R
- Land Rover Defender
- Tesla Model 3
Cars That Depreciate the Most
- Mercedes-Benz S-Class
- Audi A8
- Subaru Impreza
- Aston Martin Rapide
- BMW 2 Series
- Bentley Mulsanne
- Mercedes-Benz CLS
- Maserati Quattroporte
- BMW 4 Series
- Fiat 500L
Does Depreciation Matter When Leasing?
Kind of, but only indirectly.
At the start of your agreement, you'll need to select a mileage option for how many miles you plan to cover each year (which, by the way, you can change at any time during the agreement). Obviously, more miles will make your payments higher.
The reason for this (as well as for wear and tear restrictions), is because the more miles your lease car has on it, the less valuable it will be when you hand it back, so the leasing company is going to charge you more for the privilege.
It's still not the same as, say, buying a brand new car for £20,000 which depreciates fast, and then selling it three years later for only £8,000, at a loss of over 50%. You'll personally take the hit for any depreciation, and since you're not tied into a mileage agreement, it can be tempting to be less disciplined with how many miles you cover.
Car Depreciation: Leasing vs PCP & Buying Outright
Fair enough, you can buy with cash or take out PCP on a used car that's three years old and not lose much money when you then go on to sell it. That's because it's already went through its most rapid phase of depreciation (the first two years).
But what if you want a new car?
Well, that's when leasing trumps the alternatives. Pretty much all lease deals (including the ones we have here at LeaseLoco) are for new cars, so there’s no need to worry about the car’s depreciation as this will be built into your monthly payments. The payments you make will cover the difference between the value of the car new and the anticipated residual value once you hand it back. Even if market conditions lead to your vehicle’s depreciation being greater than predicted, it's the finance company who takes the loss – not you.
Leasing is an especially good option if you cover a large amount of yearly miles. Depreciation increases rapidly with the more miles you cover, so taking out a car lease with an appropriate mileage plan will rescue you from its effects. Just make sure you stay within your mileage quota though, as there can often be hefty charges for exceeding it.
Summary
In conclusion, there's many things you have to factor in regarding a car's depreciation and how to limit its loss in value.
Fortunately though, that's not something you have to worry about when leasing. Unlike with buying, PCP or hire purchase, there's no need to sell on the vehicle at some point in the future. You simply take out a car, enjoy it, and then hand it back. No questions asked. (Well, unless you've went over-mileage or left excess wear and tear, but that's a different story!)
And if that sounds like a great benefit, why not check out our search page to compare the hottest lease deals on the market right now, enabling you to get that brand-new car you've been dreaming about without having to worry about depreciation.
FAQs
How much do cars depreciate in value per year?
It depends on the make and model, but generally between 15-35% in the first year and up to 50% or more over three years.
Are petrol and diesel cars depreciating the fastest?
Yep, pretty much. That's because we're nearing the historic 2030 ban on the sale of new petrol and diesel cars.
How do you calculate depreciation on a car?
It's not always that simple, but to estimate how much value your car has lost, simply subtract the car's current fair market value from its purchase price, minus any sales tax or fees.