Car Depreciation: What Is It and How to Minimize It

Everyone loves the smell of a new car and the joy and excitement of telling family and friends that you have just bought a new ride. However, car depreciation is inevitable in car ownership, and a new vehicle starts to lose its value immediately after you drive off the dealership lot.

While regular maintenance can help preserve your car's resale value, it's not for too long. The good news is that you can come up with practical approaches and get the most value out of your car, which could help you beat depreciation and save money in the long run. So, what is car depreciation, and what can you do to minimize its effects? Read on to find out.

What is car depreciation?

In simple terms, car depreciation is the difference between the amount you purchase a vehicle and the amount you sell or trade it for. Depending on the make and model, a new car loses around 10% of its value once you drive it out of the showroom. Another 10-15% is lost by the end of the first year, making it the steepest loss period on the car depreciation curve.

Apart from the loss in value from wear and tear, the previous models are immediately outdated every time a new car model with advanced features and equipment is released. This tends to accelerate car depreciation even more.

Most people prioritize fuel efficiency over depreciation costs when buying a car. Nevertheless, despite gas being a considerable regular expense, depreciation tends to be the most significant cost associated with owning a car. Fuel efficiency matters, but choosing a car with a slower depreciation can yield more significant long-term savings than picking a car requiring fewer fuel station trips.

What affects car depreciation?

Several factors can influence how fast your car loses its value. Here are some factors that affect your car's depreciation rate.

Age and mileage

Age and mileage are the two significant factors affecting car depreciation. The older a vehicle is, the more mileage it has covered and the lower its value. Typically, the higher the mileage, the more wear and tear a car accumulates, which is why vehicles with lower mileage usually experience reduced depreciation rates. They appear as less worn and more desirable to prospective buyers.

Running costs

With demand in new vehicle markets pushing the fuel price up, MPG, or miles per gallon, is a key influence on depreciation. Luxury cars are the most affected.

While large cars might seem like a steal on the current market, this is only true if you can afford the running costs. Servicing and parts of a luxury vehicle that was $90,000 when new will be based on that original premium price. That is why small and city cars are so popular in the US, as their running costs are much lower.

Car condition

The overall condition of a car can greatly affect its depreciation rate. Any mechanical, exterior, or interior damage can reduce its value. Potential buyers prefer a well-kept car, meaning even minor damages can affect a vehicle's market value over time.

Make and model

If the vehicle you plan to buy or sell is a model or make that is about to be replaced, you will likely see a high depreciation. As a buyer, it's always advisable to research whether the car you plan to buy is an outgoing model and see if you can get a discount from the dealership. On the other hand, unique edition models with additional features, such as a leather interior, heated steering wheel, and adaptive cruise control, are more likely to retain their value.

Market demand

Shifts in customer preferences and market trends can directly affect car depreciation. If a car aligns with current market trends, it retains its value better due to higher demand. On the contrary, becoming unpopular can speed up depreciation since fewer buyers are willing to buy, leading to a faster decline in value.

Accident history

A vehicle with a clean accident history tends to fetch a higher resale value. Conversely, a car with records of accidents or damage usually depreciates faster due to buyer wariness about possible risks or hidden problems, negatively affecting its resale value.

How to minimize car depreciation

While you cannot completely avoid car depreciation, you can do a few things to reduce it. Here are a few practical strategies that can help preserve your vehicle's value as long as possible.

Buy a used car

A new vehicle depreciates the most in the first year. Purchasing a nearly new or used car, particularly one already 2-3 years old, can help you avoid this high depreciation.

In addition, buying such a car can save on purchase price while retaining good value over the next 3-4 years. You can sell the vehicle without losing much value to depreciation, especially if you keep it in good condition.

Schedule regular maintenance and servicing

Routine maintenance and servicing are essential for keeping your vehicle in top-notch condition and minimizing depreciation. Dents, scratches, and other external issues might limit potential resale value. Therefore, schedule regular tire rotations, oil changes, and other maintenance tasks recommended by the manufacturer. Check your car owner's manual to know when to take your vehicle to a mechanic for maintenance and servicing.

Another important consideration is to avoid modifications that can negatively affect your car's resale value. While aftermarket upgrades and accessories can be tempting, they may also make it more difficult to sell the vehicle in the future. Stick to modifications and upgrades that are easy to reverse, such as changing the music system or installing tinted windows.

Choose a common color

While you might be in love with that loud, bold color, that might not be the case for everyone. Cars with overly bold colors can be a hard sell, meaning they might cost money when it's time to sell or trade them in. Buying a car with a popular color like white, black, red, or silver will make it easier to sell, a simple way to minimize depreciation.

Keep mileage low

The more miles you drive, the more your vehicle depreciates. Avoid frequent long-distance road trips if you want to maintain the market value of your car. Opt for public transport, carpooling with co-workers, or a second, cheaper car for long trips if you frequently take long road trips.

The annual average mileage for a car is 13,500, which equates to well over 1,000 miles per month. Driving beyond this figure can significantly reduce your car's future resale value.

Maintain good driving habits

Apart from the most obvious things, driving habits can also affect the overall value of your car. For instance, aggressive driving can inadvertently cause the car parts to succumb to wear and tear. Practice safe driving habits, such as proper braking, to preserve your vehicle's components and extend its lifespan.

Ensure you follow the manufacturer's recommendations for the engine and other parts to avoid causing any further issues. You should also avoid excessive hauling and towing since, as aggressive driving, they can cause faster wear and tear.

Keep your car clean and tidy

A clean, tidy car will appeal to potential buyers and fetch a better price. Most buyers also consider a clean vehicle to be an indicator that it has been well looked after mechanically.

Clean the car regularly inside and out to maintain its visual look and feel. Avoid smoking, traveling with pets in the car, or using anything else that could leave a lingering smell.

Leverage tax incentives

You can deduct several car expenses if you own a business or use your vehicle for work. Eligible expenses may include gas, maintenance, insurance, or monthly loan payments.

Programs and eligible deductions vary from one state to another and federal agencies. Consult a tax professional to find out what might qualify for your situation.

Sell at the right time

Timing is the most important factor when selling a car. You need to consider market trends and not disregard the current supply and demand. For instance, selling a convertible during the summer or an SUV well before winter can help you boost your car's resale value.

Selling your car privately often results in a higher price than selling or trading in your vehicle at a dealership. While the amount varies by model, you are likely to receive more money if you have the time and patience to advertise your vehicle, show it to prospective buyers, and process the paperwork.

Additional perks, such as financing options and extended warranties, can make the sale more attractive. They might cost you some money upfront, but they can help differentiate your vehicle from others on the market and make it more appealing to potential buyers. Ensure you get your car cleaned and detailed before listing it for sale.

Summing it up

Car depreciation is unavoidable, but you can reduce it to ensure you get the most for your ride. Employ a few of these strategies, and you are sure to keep your car's value high for an extended period and ensure a better price when you decide to sell or trade it in after some time.