Car depreciation is how much value a vehicle loses over time. Each vehicle depreciates at a unique rate depending on factors like its make, model, age, accident history and maintenance record.
Vehicles lose value from the second they leave the lot to the day they’re written off. In fact, after just the first year most new vehicles are worth 20% to 30% less than their purchase price. Keep reading to learn how understanding the ins and outs of depreciation can save you money.
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The rate a car depreciates varies depending on whether the vehicle is new, used or leased. Let’s take a closer look at how depreciation works for each option.
New cars depreciate the fastest. Most new cars lose about 10% of their value as soon as they’re driven off the lot, and another 10% to 20% by the end of the first year. After that, you’re looking at the average depreciation rate of a car landing between 15% and 25% per year, for an average loss of over 60% by the fifth year.
If you plan to sell or trade in your vehicle within five years of buying it, you’ll likely lose a significant amount of the car’s value to depreciation.
To help give you an idea of how car deprecation works on a new car, the table below shows an example of how a new, compact car with a MSRP of $24,465 could depreciate over 5 years.
| After… | Car value |
|---|---|
| 1 minute | $22,019 |
| 1 year | $18,349 |
| 2 years | $15,138 |
| 3 years | $12,489 |
| 4 years | $10,303 |
| 5 years | $8,500 |
Because depreciation is most drastic in the first year, you could save roughly 20% to 30% by buying a used vehicle that’s one year old. After the first year, depreciation averages about 17.5%, so you could save even more if you’re open to buying an older vehicle. Plus, when it comes time to sell or trade in your vehicle, it’ll retain more of its value.
Instead of buying new or used, you could also choose to lease. The lease price includes the cost of depreciation, plus tax and interest, and has a set buyout price for the expected residual value of the vehicle. Once your lease is up, you won’t need to worry about selling the car at a loss. Simply hand over the keys to end your lease or buy it out, which can be profitable if its resale value is more than the buyout price.
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| Response | Male (%) | Female (%) |
|---|---|---|
| 65+ | 5.76% | 2.14% |
| 55-64 | 6.02% | 3.48% |
| 45-54 | 12.72% | 5.09% |
| 35-44 | 14.06% | 5.09% |
| 25-34 | 16.60% | 8.97% |
| 18-24 | 11.11% | 8.97% |
Cars depreciate the most in the first year, but level out in the following years. The average depreciation rate of a new car is 25% by the end of the first year and about 17.5% each following year.
This is how you would use this formula to calculate car depreciation on a new vehicle:
Take a vehicle with an MSRP of $27,705. Using the formula above, here’s how you would calculate the car’s depreciation after each year you own it:
The car depreciation chart below illustrates how the value of a car decreases the most in the first year. As the car gets older the curve levels out and the value drops less severely from year to year.
Your car’s value over time affects your car insurance rates in a few ways.
Whether you buy new, used or lease a vehicle, they all depreciate at different rates. Factors that influence how quickly a car loses value include:
The age of a vehicle is the biggest factor in depreciation. New vehicles depreciate the most in the first year, but the rate levels out to about 15% per year after the first couple of years.
How much you drive can influence wear and tear, which directly affects depreciation. By keeping your odometer as low as possible, you can go a long way to minimizing the effects of depreciation.
The price of gas affects the cost of driving a vehicle, so a shift in gas prices can determine how well a vehicle holds its value.
Some vehicle brands maintain their value better than others thanks to repair costs, warranties, demand, expected life cycle and other variables.
Some colours are in higher demand than others. If you choose a colour that stands out, fewer people may be willing to buy your vehicle, which could hurt its resale value.
The condition of your vehicle can directly affect the rate at which it depreciates. Even if you’ve had it repaired after multiple accidents, a lengthy service history could reduce its value.
Build options can influence how the vehicle holds up over time, like the drivetrain and transmission. Manual cars might also be harder to sell than those with automatic transmissions.
If demand outweighs supply, prices will go up. Conversely, if there are more sellers than buyers, resale value may go down.
Maintenance and service fees are a reality of owning any vehicle. If a car is expensive to maintain, people may be less likely to buy it, meaning it would depreciate faster.
If newer models have major improvements or incentives to buy them, older models could depreciate faster. The opposite can also be true — if a vehicle is discontinued or the newer version is worse than older models, the older models may hold their resale value better.
Both can affect the cost of ownership, which may impact the rate of depreciation. For example, if the government is offering a subsidy for hybrid vehicles, people could be more likely to buy them, which may lead to higher resale values.
Most vehicles come with a new vehicle warranty, some of which are even transferable to new owners. Having a valid warranty could help maintain or improve resale values and reduce depreciation.
Depreciation is the most influential factor in the long-term value and total cost of ownership of your car. But some cars hold their value better in the long run.
According to J.D. Power, the best brands for car depreciation in 2022 are Toyota, Chevrolet, Lexus, GMC, Mercedes-Benz and Subaru. These car brands were projected to have the highest percentage value of the original MSRP after a 3 or 4-year period.
Here are some of the slowest depreciating cars in 2020 according to the Canadian Black Book:
| Compact Car | Toyota Prius v |
| Compact Commercial Van | Chevrolet City Express |
| Compact Luxury Crossover-SUV | Porsche Macan |
| Compact SUV | Jeep Wrangler |
| Entry-Luxury-Car | Mercedes-Benz C-Class |
| Full-Size Car | Toyota Avalon |
| Full-Size Crossover-SUV | Toyota Sequoia |
| Full-Size Luxury Crossover-SUV | Mercedes-Benz G-Class |
| Full-Size Pick-Up | Ford F250 Super Duty |
| Full-Size Vans | RAM ProMaster 3500 |
| Luxury Car | Lexus GS-Series |
| Mid-Size Car | Honda Accord |
| Mid-Size Crossover-SUV | Toyota 4Runner |
| Mid-Size Luxury Crossover-SUV | Mercedes-Benz GLE-Class |
| Minivan | Toyota Sienna |
| Premium Luxury Car | Porche Panamera |
| Premium Sports Car | Porsche 911 |
| Small Pick-Up | Toyota Tacoma |
| Sports Car | BMW Z4 |
| Sub-compact Car | Honda Fit |
| Sub-Compact Crossover | Honda HR-V |
| Sub-Compact Luxury Crossover | Mercedes-Benz GLA-Class |
| Zero Emission Vehicle | Ford Focus |
While you can’t avoid depreciation, there are ways to reduce how fast it affects your car. From buying a car that has a reputation for reliability to staying up to date with maintenance, you can help your car maintain more of its value. Find even more ways to reduce your car’s depreciation.
There are a number of ways you can use depreciation to your advantage:
While car depreciation affects every make and model differently, you can reduce the impact by understanding how it works. Shop for a car that’ll save you money on insurance and depreciation in the long run by comparing your insurance options.
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