6 ways to reduce car depreciation
Why do cars depreciate? Can you avoid it? How do you minimise your losses? Find out with this car depreciation guide.
Most cars decrease in value over time, a phenomenon known as depreciation.
Why do cars depreciate?
Like many things, cars lose value with age, something you’ll find out when you come to sell your wheels or trade them in. Depreciation is actually the most significant costs of car ownership.
Some sources state depreciation can be as high as a 45% reduction in value in the first three years. After three years, a car may only be worth 55-60% of its original asking price. Another source suggested as soon as a car is driven off the dealership’s premises, it drops 10-11% in value. Five years later, the car may now only be worth 60% of the original asking price.
Depreciation does tail off with each successive year, the first year of a car's life claiming the biggest losses.
Some cars, usually classic cars or rare models, buck the trend of depreciation and appreciate in value. Others skip depreciation due to high-demand and long waiting times for new models – buyers may look to nearly-new examples and be willing to pay handsomely for them.
Impacts on depreciation
You can reduce the amount of money lost when selling or trading in your car if you consider the following depreciation factors:
Did you know that the make of your vehicle will affect depreciation? Buying a car from a brand with an excellent reputation will often result in a car that holds its value better than one from an up-and-coming car manufacturer or a new brand. After all, who wants to risk their own money by purchasing a car without a solid quality track record or is poorly built?
Brands with a lower value perception and asking price, like Chinese ute makers, will likely depreciate faster. Other external factors that can affect depreciation include how easy parts are to source plus the quality of a dealership’s after-sales support.
The top five most popular brands in Australia, as of May 2018 are:
|Top 5 bestselling brands in Australia||New vehicle market share|
Customer satisfaction with after-sales care also forms a part of the overall automotive brand’s perception.
According to researchers J.D. Power, here are the top five brands for after-sales care.
Ford and Toyota both scored 82.3% customer satisfaction, above the 82.2% market average.
For the luxury car segment, Lexus placed first with 86.9%. Mercedes-Benz scored 85.2% and the market average was 84.2%. Both BMW and Audi sat below this mark.
Select the right paint
Even the body colour and interior trim can affect vehicle depreciation prices, so choose well.
Read this guide to see how car colour impacts on resale values.
Automotive product development cycle
Before buying a car, check to see where it sits in its current product cycle.
Manufacturers generally launch a car and then give it a mid-model minor refresh before finally replacing with an all-new model. The product cycle takes anywhere from three to six years.
Each time designers bring out a revised model, the older versions are always outdated. The newer generation also invariably receives more modern technological advancements and features.
Why should this concern you? Well, if you buy a car right before a face lift or relaunch, it could instantly devalue your own car. Buyers want a modern-looking and more desirable style so the demand for your older vehicle may drop along with the value.
Try waiting until a car maker launches a refreshed car or an entirely new model before making a final decision on a purchase. If you research expected automotive product launches, you should be able to drive down the price on an outgoing model and negate some of the future depreciation.
If you purchased two identical cars, parked one in a garage and totally thrashed the other one, which one do you think would be worth more in three years time? The lower mileage car that’s in better condition.
So treat your car well. Make sure you service it according to the manufacturer’s maintenance schedules. Keep all receipts and documentation, and make sure to look after your car, by:
- Regularly cleaning it, which helps protects the condition.
- Keeping the fluids topped up in between service appointments to preserve the car mechanically.
- Repairing any scratches.
- Using seat covers to protect the upholstery.
- Parking in a garage if possible. This protects the paintwork and helps reduce the chance of rust or corrosion developing.
Then, when it comes to selling your wheels, your car should look just as good as it did when it left the dealers.
This will help combat depreciation and impress on potential buyers that you’ve looked after the car well. This guide will help you understand how to keep your car in perfect condition.
Generally speaking, the lower the number of kilometres on the odometer, the more attractive a car will be. Why? With fewer kilometres travelled, there’s less wear and tear placed on the engine and other mechanical parts.
Cars only have a limited lifespan. Eventually, use will lower its value. Modern engines can easily cover 250,000km if well-maintained, and some go even further. However, as a buyer most people look for a car with lower mileage and is theoretically closer to as-new condition (or has more life left in it).
The average Australian travels approximately 15,000km per year, so if you drive less than that annually, your car’s value will be higher.
If you travel for business or take long journeys, you should be able to reduce depreciation exponentially with regularly-scheduled maintenance. Short trips can play havoc with many modern emission-control systems and internal components.
Much like vehicle brands, the car models and styles will also affect resale values. Right now, SUVs of all shapes and sizes are hot sellers, along with double cab utes.
The top two bestselling models in Australia are the Toyota Hilux and the Ford Ranger. Small cars are also popular.
On the flipside, many carmakers are phasing out typical passenger cars and sedans, in favour of more sought-after SUVs, so pick your body style and car type carefully.
Other ways to avoid vehicle depreciation
There are other ways to skip on the depreciation bill. You could start by buying a used car that’s at least three years old, after the majority of a vehicle’s depreciation.
You might also buy a car over ten years old when vehicles are often pretty cost-effective. Bear in mind though that older cars will not protect you as well in a crash thanks to rust and obsolete technologies. A five-star crash rating from 2001 is a world away from a 2018 top score.
Finally, if you use the vehicle for business, you might be able to reclaim a percentage of the depreciation against your tax. Speak with your accountant.
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