Advice from Intellichoice: Depreciation Overview

This is the big one - at least for most cars during the first few years they’re on the road. In fact, some cars depreciate as much as 20% or more during the first year alone!

Depreciation is the amount something decreases in value over time. Although it’s a very real cost, depreciation is tricky because you don’t get a monthly bill for it. You don’t continually dole out money from your pocket to pay depreciation as you do, for example, every time you visit your mechanic. But make no mistake about it: you will pay for depreciation when the time comes to sell your car and buy another one.

For instance, let’s assume you purchase a car for $20,000. If you unload it five years later for $8,000, you’ll have spent $12,000 in depreciation to own the car. The cost of depreciation should be a primary factor in your choice of which car to buy. If you expect to keep the car five years or less, it will likely be the most important factor. Not all cars depreciate as much or at the same rate. Why is this? It’s one of life’s little mysteries, but here are some likely reasons:

Cars that capture the public’s fancy tend to hold their value. The MINI Cooper is still a very popular vehicle that has high demand and comparatively low supply. Some hybrid models and most clean diesel cars often have strong retained values because high fuel costs have created high demand; in addition, hybrid and clean diesel cars are not produced in large quantities.

When the price of a popular model increases, the price of used versions of the same car may also rise. The price of a used car is based in part on the price of its new model. Therefore, when the price of a new model has a significant increase relative to other new vehicles, used versions of the same model tend to hold their value.

A car’s depreciation will vary depending on whether the car accumulates either very high or very low mileage for its age. The normal annual mileage range is generally considered to be between 10,000 and 15,000 miles.

The base model in a lineup often holds its value better than higher-priced models. An XLT, Limited, or some other premium edition will usually cost several thousand dollars more than the base edition when new, but its resale value won't be nearly that much higher than the base model’s after five years. This makes expensive trim lines relatively poor new-vehicle buys, but attractive pre-owned finds.

A vehicle’s class is often an indicator of its resale value. Large cars, luxury cars and minivans typically don’t hold their value as well as compact passenger cars and sporty coupes.

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