Paying off your car loan, making sure your car is insured, and covering any repairs or maintenance that might be necessary are some of the many financial responsibilities of owning a car. But another budget killer that many consumers often forget to take into consideration, but definitely should, is the cost of depreciation. This is particularly true for newer cars, as their rate of depreciation is a lot faster than a used car. Thankfully, there are numerous ways you can help reduce your car’s depreciation.
Key Points
- Cars typically depreciate much faster over the first few years, then the rate slows down as the car ages. That said, some cars, generally higher-end cars, may appreciate in value.
- Several factors influence how quickly a car depreciates, including its age, condition, type, and mileage.
- To slow the rate of depreciation on your car, limit mileage, keep it maintained, avoid excessive modifications, and consider buying used.
What Is Car Depreciation?
Car depreciation is the measure of how quickly a car loses its original value. A brand new car can lose around 20% of its value as soon as you buy it and drive it off the lot. This is because the dealership can no longer sell it as “brand new”. Your car can also depreciate from things like wear and tear, accidents, and of course age.
The depreciation process is nonlinear. Your vehicle loses its first bit of value – about 20% – when you first drive it off the lot. After one year, the car is worth about 80% of what you paid for it. After that, the car loses about 10% – 15% of its value each year. After 5 years, the car may lose up to 50% – 60% of its value.
Ways To Reduce Your Car’s Depreciation Before You Buy
You don’t have to wait to own your car to take action to reduce depreciation. You can reduce your car’s depreciation even before you buy it. Here are a few ways to reduce your vehicle’s depreciation before you even buy it.
Buy A Pre-Owned Vehicle
Brand-new cars can depreciate quite a bit in the first year you own them, while pre-owned vehicles depreciate more slowly in the first few years of purchase. This is because new vehicles are only considered “new” until they are driven off the lot.
As such, it can be smart to buy a slightly used car over a brand new one. Doing so will allow you to avoid the cost of the initial depreciation. Moreover, pre-owned vehicles are generally still in good condition and may still be covered by factory warranties.
However, it’s also important to understand that pre-owned vehicles start to depreciate quickly after about five years of ownership. This is because of the increased likelihood of mechanical issues and the expiry of factory warranties.
Pro Tip. Before buying a used car, do your due diligence. You want to make sure it wasn’t in an accident or something.
Choose A Popular Vehicle Make And Model
When purchasing a car, it’s best to choose one that doesn’t simply maintain its value over time, but one that is popular with the public. Buying a car with a mainstream make and model, such as a Honda Civic, will make it easier to sell in the future as it is a well-known car.
Cars known for their safety, fuel efficiency, and reliability are other factors to consider when purchasing a car. These cars usually maintain their value and can come in handy if you ever decide to sell or trade-in your car.
Choose A Common Car Colour
The colour of your car can impact the rate it depreciates. In general, standard colours like black, white, and gray retain value the best. As such, if you buy a car with a common colour, you will have an easier time selling it. On the other hand, bold and bright colours, such as yellow or lime green, are harder to sell due to the lack of buyers looking for such colours.
Similarly, avoid buying cars that are easier to steal or often get stolen. Here’s a list of the top stolen cars in Canada.
Get An Extended Warranty
Extended warranties help to reduce depreciation because they can often be transferred to other people, as long as they have not yet expired. So, anyone buying your car might be covered. This warranty will offer some comfort to future buyers.
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READ ARTICLEWays To Reduce Your Car’s Depreciation After You Buy
Even if you take action to reduce your car’s depreciation before you buy it, there is still more you can do to reduce your car’s depreciation afterwards.
Maintain The Car And Keep Maintenance Records
If you maintain your car by doing regular oil checks and keeping up to date with its services, your car will better retain its value. As such, it’s important to keep track of all your car maintenance and repair receipts.
Being able to prove that you have regularly performed maintenance on your car will allow you to sell your car for more money. A buyer can see you took good care of the car and will have some peace of mind.
Protect And Treat Your Vehicle To Extend Its Life
The price of your car is heavily influenced by its wear and tear. Rust, dents, cracks in mirrors, and other forms of wear and tear can decrease the value of your car. Adding certain protective accessories can help combat this, such as the following:
- Floor Mats: To avoid stains associated with foods and drinks.
- Rustproofing: This is especially important if you live in a cold climate where it snows and rust is a common problem.
- Paint Protection: This is an additional coating on your car that leaves it looking pristine for longer periods of time.
By treating your vehicle, you’ll be able to maintain its value for a longer period of time, which in turn can lead to a buyer willing to pay more if you ever sell your car.
Keep The Mileage Low
The more mileage there is on a vehicle, the higher the chance that it will need expensive repairs and maintenance. Keeping your vehicle’s mileage low lets sellers know that your vehicle may still be in good health.
Drive Safely And Avoid Accidents
Not only do accidents require repairs and potentially create problems for your car in the future, but accidents and repairs that are reported to your insurance company are also added to your car’s history report. A potential buyer may be wary of buying your car if it has a long history of accidents and repairs.
Keep It Clean
In general, a clean car will be a lot more appealing than one with stains and a funky smell. If you keep your car clean by regularly washing it, vacuuming it, and not smoking in it, potential buyers are more likely to take an interest in your car. It can also help your resale value by avoiding drinking, eating, or smoking in the car. If you have a pet, adding a seat cover is a good way to keep your car clean.
Avoid Flashy Modifications
While over-the-top features like suspension upgrades, turbocharge, and other flashy modifications may seem appealing, they may not suit everyone’s tastes. Unfortunately, not everyone likes these types of extras on their car. If you modify your car, be mindful of the upgrades made and make sure they’re the types of features that are sought-after among car buyers.
How To Calculate My Car’s Depreciation?
Car depreciation varies based on the vehicle’s make and model. To estimate your vehicle’s depreciated value, you’ll need to know it current market value, then subtract this amount from the original purchase price. You can look up the current value of your car using a variety of online resources, such as the Canadian Black Book.
Once you know the value of your car according to current market conditions, you can plug it in to the following formula to determine your car’s depreciation:
| Original Purchase Price – Current Market Value = Car’s Depreciation |
Let’s say your car is currently worth $25,000, and you originally bought it for $40,000. In this case, your depreciation would be $15,000.
This is, however, just a ballpark figure. To get a more accurate idea of your car’s depreciation, including its rate of depreciation, you can use an online depreciation calculator.
Using the same $40,000 original purchase price as the previous example, and assuming you bought the car new, your car’s depreciation each year would look like this for the first 5 years:
| Year | Depreciation Amount | Remaining Value |
| 1 | $3,600 | $36,400 |
| 2 | $10,000 | $30,000 |
| 3 | $14,400 | $25,600 |
| 4 | $18,800 | $21,200 |
| 5 | $22,400 | $17,600 |
How Do I Avoid Negative Equity?
Negative equity happens when your vehicle’s value is less than the amount you owe on your car loan. You want to avoid negative equity because it can make it harder to trade in or sell your vehicle. If you sell the vehicle for less than you owe, you will have to pay the difference.
To avoid negative equity, consider the following:
- Don’t Buy A Car You Can’t Afford. You might get stuck with negative equity if you finance a car you can’t afford. To avoid this, try to keep your car payments under 10% of your monthly paycheque.
- Avoid A Long Loan Term. Longer terms mean higher interest payments, meaning you’ll be paying more for your car. Just keep in mind that although a shorter term means higher payments, more of that money goes to the principal rather than interest.
- Make A Larger Down Payment. The bigger the down payment, the less you have to borrow and the more equity you’ll have in the vehicle. This can help reduce the likelihood of negative equity.
- Don’t Roll Over Your Car Loan. If you combine a previous car loan with your new car loan, you’ll have to make larger payments, potentially bringing your equity into the red.
Bottom Line
No matter what you do, your car will depreciate and lose some of its original value. That being said, there are things you can do both before and after you buy a car to slow down the depreciation process and maximize your car’s resale value, like buying used, keeping mileage low, and maintaining its condition, among other things. The more you can do to slow your car’s depreciation, the easier it will be to sell in the future at a higher price.
