February 17, 2009

Car Depreciation

When you buy a car it will lose value over time. Most people know that a new car will lose a significant amount of its resale value the minute you drive it off the lot because it is now 'used' rather than 'new'. How much do cars depreciate and how can you figure the amount of depreciation?

Cars will vary in depreciation rates depending on the brand and model. More attractive brands which are more dependable will depreciate less. So theres no one answer about depreciation rates but you could use average depreciation to get a ballpark idea.

Rough Ballpark

Roughly speaking you can assume a car will lose 20-30% of its value in the first year. In subsequent years it will lose 10-20% in later years. As a very rough guess on depreciation you could use 25% for year 1 and 15% for later years.

Online Calculators
Another way to estimate depreciation is to use a calculator. Here is a simple car depreciation calculator which will estimate rough amounts of deprecation at low, medium and high levels. Here's another car depreciation calculator.

More specific estimates

Each model of car will depreciate differently.

If you currently have an older car then you can find out the estimated market value on the Edmunds.com site. Their True Market Value estimate is a realistic measure of what you can buy/sell a used car for.

Or if you're looking to buy a new car you could look at the Total Cost of Ownership estimates. This will give you an idea of how the car will probably depreciate in the near future. For example you can look up the TCO for a 2008 Toyota Camry at the Edmunds site. In the table it shows the depreciation for years 1-5 as : $3763, $2237, $1969, $1746 and $1567 respectively. With a purchase cost of $21,130 that equates to 18%, 10.5%, 9%, 8%, 7%. In 5 years it depreciates $11,282 or 53%. Thats a relatively low depreciation rate. ON the other hand if you look at a 2008 Ford Focus with a cost of $12,067 the depreciation for years 1-5 is $4058, $1340, $1180, $1045, $938. That equals 33%, 11%, 9.8%, 8.6%, 7.7%. The total depreciation is $8,561 over 5 years for 71% total depreciation. As you can see the amount of depreciation differs a lot between those two 2008 model cars.

Mileage and Condition matter a lot

Of course not every used car is the same. My Toyota has a lot of miles on it so the value is lower. My wife's car is in very good shape so its value may be higher than other cars of the same model. When you're looking at depreciation you should also consider the mileage on the car, the wear and tear and the kinds of options it has. Its a decent rule of thumb to assume cars will have about 12,000 miles per year. If the car has fewer miles it will be worth a bit more and higher mileage cars will be worth less. The used car appraisal that Edmunds does usually adds or subtracts 8¢ per mile so you could use that as a rough guide for the impact of mileage above or below 12,000 annually.
Can Cars Appreciate??
Usually cars simply go down in value over time. However, classic cars can potentially appreciate in value. Once a car is 20-30 years old or so it may have value as a collector item. Of course not every 30 year old car is going to have appeal. If you have a 1964 Mustang then it will probably gradually appreciate in value. Classic cars may very well appreciate but in general but I would not count on any appreciation for a car unless you know it has good demand as a classic vehicle.

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