What Is the Car Depreciation Curve? A Closer Look

Did you know that a new car loses an average of 11% of its value the moment you drive it off the lot? This isn’t good considering the car would be brand new. This is also something that can throw consumers off of the trail of a brand new car.

Think about this as well, within the first year, it will have lost around 20% to sometimes 30% in value. This may seem like bad news if you’re in the market for a new car. Buying used is an even better alternative in some cases.

In Canada, you’ll notice that a car can lose up to 34% in value within its first year of having it. Either option you decide to go with, you will still have to deal with depreciation.

We’re going to explain why that is and we’ll also take a closer look at the car depreciation curve and what you can expect in terms of losses over time. We’ll also give you some tips for minimizing depreciation of car cost. So, whether you’re in the market for a new set of wheels or want to be better informed, keep reading.

What Is the Car Depreciation Curve and Why Does It Happen?

The car depreciation curve is the rate at which a vehicle loses its value over time. Simply put, it’s how much money you can expect to lose on your car based on how old it is. And yes, the moment you drive a new car off the lot, it starts to age.

There are a few reasons why depreciation happens, but the main one is that a car is a depreciating asset. This means that it loses value over time, regardless of how well you take care of it.

One of the other main reasons depreciation happens is due to wear and tear. Every time you drive your car, it slowly starts to fall apart. Not necessarily in a visual way but this means it wasn’t how it was before you drove it off the lot. This is especially true for parts like the tires, brakes, and engine, which all have to work harder the more you drive.

Another reason depreciation occurs is due to changes in technology. Newer cars will almost always be worth more than older cars because they have newer, more advanced features.

This is a good point for luxury and performance cars, which often depreciate at a faster rate than other types of vehicles. Don’t forget though, that a new vehicle will depreciate at more of a rapid rate because used cars have already experienced that steep drop in value.

How to Minimize Depreciation Costs

There are a few things you can do to minimize the amount your car depreciates. One of the best things you can do is to take good care of it and keep it in good condition. This means regular maintenance, including oil changes, tune-ups, and tire rotations.

Another thing you can do to minimize depreciation is to choose a car that doesn’t depreciate as fast. This includes cars from Japanese manufacturing brands like Toyota and Honda, which are known for their reliability and resale value.

You can also choose a car that’s in high demand, as these will often hold their value better than other cars. Popular models from Mercedes-Benz, BMW, and Audi are all good choices in this regard.

Another thing that you can do is to buy a used car instead of a new one. As we mentioned earlier, a used car will have already gone through the biggest drop in value, so you won’t have to worry about it depreciating as quick. Keep in mind that after that first-year dip in depreciation, a vehicle will often continue to depreciate by 15% to 25% every year until it hits its five-year mark.

This is directed toward new vehicles. What this is saying is that you can expect your car to lose 60% of its entire value after only having it for 5 years, sometimes sooner. This may be another reason to look for used vehicles instead unless you don’t mind the steep drop in value.

What Factors Influence the Depreciation Curve

Several factors can affect the depreciation curve of a vehicle. Many of them will fluctuate based on what you decide to get and the condition that it’s in before and after purchase. Some of those factors will include:

  • The type of vehicle (luxury, economy, etc.)
  • The make and model of the vehicle
  • The age of the vehicle
  • The mileage on the vehicle (higher mileage equals faster depreciation)
  • The condition of the vehicle (damaged or well-maintained)
  • The demand for the vehicle (popular vehicles hold their value better)

As you can see, there’s no one-size-fits-all answer when it comes to the car depreciation curve. However, there are some general trends that you can keep in mind when trying to estimate the value of your vehicle over time.

In general, newer vehicles tend to lose value faster than older vehicles. This is because they depreciate the most in the first few years after they’re purchased. The car depreciation curve is also a graphical way of representing how fast a car loses value over time.

A good way to determine the depreciation for your vehicle or to forecast what the depreciation rate of a vehicle that you want might be you can use a vehicle depreciation calculator. This is a good way to see potential depreciation on a scale, which will help you make a better choice for your future vehicle.

How to Use the Depreciation Curve to Your Advantage

Now that you know a little bit more about the car depreciation curve, you might be wondering how you can use it to your advantage. Here are a few tips that you could try:

Do Your Research Before Buying a New

Before you buy a new car, it’s important to do your research and figure out which models hold their value the best. This way, you can avoid overpaying for a car that’s going to lose a significant amount of its value as soon as you drive it off the lot. When you buy new this is inevitable but what you can help is not if it will depreciate because it will, but you can choose something based on the quickness of depreciation.

Consider Buying a Used Car Instead of a New One

We briefly mentioned this but buying used is often the best-case scenario when buying a new car. If you’re not set on owning a brand-new car, consider buying a used vehicle instead. Since used cars have already taken the biggest hit in terms of depreciation, you can often get a great deal on a used car that’s only a few years old.

Sell Your Car Before It Reaches the End of Its Depreciation Curve

Once a car reaches the end of its depreciation curve (around five to six years), its value starts to level off. If you’re not planning on keeping your car for much longer, this is a good time to sell it. While a car is often considered to be a “five-year property”, it takes a complete six calendar years for a car to fully depreciate.

This gives you a bit of time before having to think about selling it. The thing is though, not too many people get rid of a car that they purchased only six years ago. People are oftentimes still paying it off in some cases.

On average, people often keep their cars for around 11.9 years. So, your car will have fully depreciated by then.

However, your car will still be worth something in terms of resale value. If you want to get the most of your money back though, consider selling it and buying a newer model before the end of that curve.

Trade-in Your Car Before It Reaches the End of Its Depreciation Curve

If you’re planning on buying a new car, it’s often best to trade in your old one before it reaches the end of its depreciation curve. This way, you can get the most value for your old car and avoid having to sell it privately. Selling privately isn’t always a bad thing though.

Doing so could allow you to sell it for a higher price especially if you made some modifications to the vehicle. If you put on brand new tires recently, installed a new and more advanced engine, and replaced the steering wheel it might be best to sell it on your own. You can also get a quote from a dealership on what their trade-in price would be and determine the best course of action from there.

The Bottom Line

The car depreciation curve is a natural process that happens to all cars over time so there is no way to avoid it unless you have your car shipped to you, covered and you never drive it. Not too many consumers are willing to do that otherwise there wouldn’t be a reason to buy.

However, there are things you can do to minimize your car’s depreciation rate. You need to take good care of it, choose one that doesn’t depreciate as quickly, and buy used instead of new.

If you’re ready to get your dream ride, take our vehicle quiz today.