How important is depreciation when choosing a used vehicle?

When a car leaves the dealership, it often experiences a significant drop in value during the first few years of ownership. While the depreciation process tends to slow down after that, every vehicle eventually loses all of its value and ends up in a scrapyard.

However, not all cars depreciate at the same rate. Some models lose their value quicker or at other points of their life cycle than others. Many factors may affect a car’s value, and it's a good idea to understand them when looking for a used vehicle.

Why does depreciation matter for used vehicles?

Understanding depreciation allows you to save money in the long run, as you can choose a car that depreciates less.

When talking about financed cars, rapid depreciation can lead to being "upside down" on a loan, where the car's value is lower than the remaining loan balance.

Knowing how a car's value changes over time helps sellers set realistic asking prices. The internet is full of various car depreciation charts, which may help you decide the best time to sell your car before it loses too much of its value.

How depreciation makes used cars more appealing

Some people say that buying a new vehicle from a dealership is a waste of money, as it will lose around 15%-35% of value within the first year. Let’s say you paid $50,000 for a car. After only one year, its value may be around $32,500-$42,500. The specifics depend on a car’s model, equipment list, mileage, and many other factors.

Because of high depreciation in the first few years, many drivers prefer buying used cars to avoid a significant drop in their value. This way, you can get a car with the latest technology, design, and safety features for a significantly lower price.

Moreover, as a vehicle gets older, its depreciation slows down. If you buy a 15-year-old car, it has already lost most of its value, therefore, in the next few years, the depreciation won't be noticeable.

Factors influencing the rate of depreciation

The depreciation rate depends on a number of factors. Even things like a car’s color can have an impact on a vehicle’s price. Not to mention more significant factors like the engine type or the year of manufacture.

Make and model

Every car model has a different depreciation rate, which may depend on factors like brand reputation, demand, features, and technological advancements. Typically, luxurious cars lose value the quickest, as used car buyers are less interested in supercars like Aston Martin or premium brands like Mercedes-Benz.

People who buy used cars want to save money – luxurious features of premium-class vehicles are less relevant to them, driving down the demand for more expensive models.

Japanese brands like Toyota, Lexus, or Honda typically hold their value best, as they’re widely perceived as trustworthy vehicles and known for their quality engineering.

Supply and demand

When the COVID-19 pandemic caused interruptions in the supply chain, this led to a shortage of new cars. It also affected the used vehicle market, driving the demand up and boosting prices. Many owners reported selling their cars for the same price they paid at the dealership several years ago.

The demand for a particular model depends on many factors. Let’s take Tesla, for example.

Tesla’s cars hold their value better than most electric vehicles. Led by an eccentric owner, Tesla vehicles are desired across the world. However, since people have to wait a long time for new deliveries, used Teslas keep their value well.

This trend can also be seen among other EV manufacturers. While many drivers are still skeptical about going electric, EVs depreciate slower than gasoline or diesel vehicles.

Consumer habits are changing. In the recent decade, SUVs have grown in popularity, whereas sedans saw a decline. This translates into SUVs keeping their value better than sedans. Of course, everything depends on the particular car, and this rule doesn’t apply to the whole market.

Limited production models like the Porsche 911 GT3 or classic cars like the Ford Mustang from the 1960s tend to hold their value well due to collector demand and rarity.

The vehicle's age, mileage, and condition

The general rule of thumb is that the older a car is, the less it will cost. Unless we’re talking about vintage cars from 30 years old.

Mileage is another factor that influences the depreciation rate greatly. A car with more miles on the odometer will always cost less. That’s why insincere sellers often clock a vehicle’s mileage, artificially increasing a car’s price. This is a big problem in the used vehicle market, as buyers may not only overpay for a car but also risk failing to perform maintenance on time.

A vehicle that has been regularly serviced tends to retain more value over time. A 5-year-old car with documented oil changes and other service records will retain more value than an identical model with no maintenance history.

Vehicles with minimal exterior wear, unblemished paint, and a well-preserved interior will cost more than worn-out cars covered with scratches, dents, and interior stains.

A car with a clean accident history retains higher value. When searching for a used vehicle, it’s important to check its history online to learn if it has suffered any severe accidents in the past.

Technological advancements and newer models

When a newer version of a model is released, the previous version usually loses some of its value. This is purely a psychological thing, as everyone wants to drive the latest model, equipped with advanced technology and the latest features.

Cars with manual windows, CD players, or basic air conditioning systems will attract fewer buyers, resulting in lower prices. While not everyone is interested in having a car with the latest infotainment system or keyless entry, buyers still want at least a basic level of comfort.

Economic factors

During periods of economic growth, people spend more money on vehicles, which results in a higher demand and slower depreciation. However, if the economy starts shrinking, the used vehicle market will also be affected, as the prices will go down.

Since interest rates started climbing in 2022, many buyers choose used cars over new ones. However, because the supply of second-hand vehicles is short, you can expect to sell your car for more than a couple of years ago.

Rising fuel prices also affect depreciation. Many buyers prefer fuel-efficient vehicles like hybrids or EVs, abandoning traditional trucks and SUVs with big engines. However, this trend also depends on the country, as every market has its own peculiarities.

Maintenance and repair costs

A well-maintained car will always have a higher price, especially when the owner can provide all the documents about regular maintenance and repairs. SUVs, trucks, and premium-class vehicles are usually more expensive to maintain. Their parts are also expensive, driving the total cost of ownership up and fueling the depreciation.

Even such a trivial thing as a set of new tires will cost more for a truck compared to a small hatchback or wagon.

Insurance rates

Insurance rates are calculated individually for each car, considering a specific model, engine capacity, body style, price, and even where you live. The most expensive insurance is for luxurious SUVs, sports cars, and premium-segment vehicles. If you want to pay for the insurance as little as possible, choose a small car with a less powerful engine.

Fuel economy

Cars with better fuel economy depreciate slower than those with poor fuel efficiency. This is bad news for petrolheads in love with trucks or sports cars where 4-7 liter engines are the norm. Unfortunately, in the second-hand vehicle market, the rules are a bit different, and significantly fewer drivers are ready to feed these gasoline-thirsty beasts.

Makes and models with historically slow depreciation

While you may find dozens of different depreciation charts on the internet, here’s the list of some cars that hold their value well:

• Toyota Land Cruiser
• Toyota 4Runner
• Toyota Tacoma
• Toyota Corolla
• Honda Civic
• Honda CR-V
• Subaru Outback
• Porsche 911
• Lexus GX
• Jeep Wrangler
• Ford Mustang
• Chevrolet Corvette
• Audi Q5
• Mercedes-Benz G-Class
• Tesla Model 3

Common myths about depreciation

Source: Hayes Potter / Unsplash

All cars depreciate at the same rate

Cars depreciate at different rates, depending on factors like make, model, engine capacity, reliability, price, mileage, age, maintenance, damage history, and more. Even if we take two identical models manufactured in the same year, after 5, 10, or 20 years their value will differ.

Depreciation doesn't matter if you plan to keep a vehicle long-term

Even if you plan to keep your car forever, your plans may change and you’ll have to sell it. Picking a model that depreciates slower will guarantee you’ll lose less money. Of course, your driving habits and how you maintain your vehicle also play a significant role.

While depreciation is not the first thing you may consider when searching for a used vehicle, understanding the basic principles driving a car’s depreciation and knowing brands that depreciate slower may help you make informed decisions. If you choose the right model and show it some love, you’ll be able to get more money for it even after many years of ownership.