Most people interested in buying a car will have heard of depreciation, but what is it, how does it affect vehicle purchasers and what are the factors that can affect the rate of depreciation? Read on, to find out more…
What is depreciation?
Simply, it is a loss of value in any consumer-purchased product. In automotive terms, it will have more of an effect on new cars than it will on second-hand (used) cars, with it predicted that a brand-new vehicle will lose between 15 and 35 per cent of its value in its first year, and up to 50 per cent across the space of three years of ownership. So, if you bought a brand-new car for €30,000 and it suffered 50 per cent depreciation after three years and 100,000km, then it would be worth €15,000 by the end of that period. It is said by financial experts that choosing a car that depreciates in value more slowly than an equivalent will actually save more money in the long run than picking a more fuel-efficient car ahead of another.
Which factors affect the rate of depreciation?
One of the biggest determinants of depreciation is brand perception – it’s why the premium marques, such as Audi, BMW and Mercedes, which were once out of reach of most people on the grounds of affordability, have seen an upsurge in sales in recent years. Personal Contract Purchases, otherwise known as PCPs, are calculated on the depreciation in value between the car when new and after a set period and amount of usage (normally three years and 60,000km), minus a deposit. So, if a car is deemed to hold its value better, then the monthly costs of the vehicle are lower on PCP because you are financing less depreciation.
As we’ve already said, new cars depreciate faster than used cars – the biggest drop in value comes when you drive the vehicle off a forecourt for the first time, and then the depreciation curve begins to level out (slowly) from there. You will therefore lose less of a car’s value (in percentage terms) if you buy an eight-year-old vehicle and run it for two years and 20,000km, than you would buying a new or a one-year-old vehicle and doing the same thing. However, with the exception of some highly desirable classic machines and a handful of very rare, very expensive new cars from prestige manufacturers, all cars depreciate in value over time – even used vehicles.
Specific factors that can vary the rate of depreciation on a given car relate to usage. If you do lots of miles per year, the depreciation will be faster as the second-hand market prefers lower-mileage cars. If the vehicle has had a lot of owners, instead of one or two, then it is less desirable to the next potential buyer and will therefore depreciate more than an identical example of the same car with fewer owners. If its general condition is poor (damaged bodywork, tired and dirty interior etc), it will be worth less than if you keep it looking tip-top. Cars with a full service history are more desirable than ones without, while any second-hand vehicle that is still under the manufacturer’s ‘from new’ warranty (like a four-year-old Kia, for example) will be worth more than a car with no cover at all.
There are then further details that require you to have some knowledge of the market and wider industry, as things like midlife model facelifts can variously affect the value of second-hand cars that are very close in all other respects (so pre-facelift cars are usually worth less than facelifted examples), while large, luxury saloons (e.g. Audi A8, BMW 7 Series, Lexus LS and Mercedes S-Class) are the worst-depreciating motors of the lot – they put off second-hand buyers because, while their purchase prices come down, their running costs do not; so servicing and replacement parts are going to be very expensive, even if you’ve picked up a 750i for €4,000. On the subject of running costs, increasingly, the fuel efficiency and emissions outputs of cars can affect used prices, because exactly the same age, mileage, specification and condition of vehicle could be worth more as a diesel than as a petrol, due to lower road tax implications. In general, the lower the CO2 output and the greater the fuel efficiency of a vehicle, the more desirable it will be on the second-hand market.
How to minimise depreciation
Well, aside from the obvious recommendations tied to the details above – so keep your mileage down as much as possible, make sure you repair, service and maintain your car on a regular basis and buy a nearly-new or used car to avoid the steepest depreciation – there are a few more tips you can work on:
- Don’t modify your car, for starters, as you will never recoup the money you invest on the modifications and the vehicle won’t be worth anything more on the second-hand market than a stock example of the same car; in fact, it might even be worth less, as many buyers find modifications distasteful.
- Don’t buy loud/daring colours. The reason there was a huge boom in the number of boring white, silver, grey and black cars in recent years is that they are easier to sell on than cars in lime green, searing orange, canary yellow or dung brown. You might love a bright red car (and we don’t blame you), but many car buyers are conservative types who just want sedate colours. That means monochrome cars depreciate less quickly than their gaudily-coloured relations.
- Sell your car at the right time of year. Although modern convertibles are no longer leaky or cold in the winter months, there’s still a seasonality to their second-hand market prices – as in, they’re worth more in early spring, when people are thinking about some summer top-down motoring, than they are at the end of autumn, when people are considering wrapping up warm for winter. It’s the inverse for 4x4s, which are most in demand in autumn and the darker months.
- Choose the right options and specification. If you’re buying new, then there will be certain bits of optional equipment you ought to have fitted to your car to make it more desirable further down the line – so things like metallic paint, satnav, climate control and a leather interior, all of which can affect future values. Also consider spec: people love S line Audis, for instance, more than they love SE Audis, so a sportier trim line might be worth the extra outlay when buying new, as it’ll pay you off when it comes time to sell in the future. If you’re going for a second-hand car, look for used examples with more options fitted, and check that the seller in question knows which items on their car were standard-fit and which were cost upgrades – don’t just take their word that ‘fully loaded’ actually means fully loaded.
- Do your research. Plenty of sites will give you valid, impartial advice as to which brands depreciate faster than others, and which models of car are particularly desirable on the second-hand market. Also check the values of similar vehicles to your own, using a site like Carzone.ie as your guide.
- Sell your car before an all-new model arrives. For instance, if you’ve got a lightly used, 2018-on Skoda Octavia Mk3, it will be worth quite a bit more now than it will be in a few months, when the Octavia Mk4 arrives and depresses the Mk3’s values further.
- Consider leasing and PCP purchasing, as both these methods of ‘buying’ a car involve factoring depreciation into their monthly costs, so you won’t be hit in the pocket further down the line. It’s why both methods of automotive finance have become so popular in recent years.
Carzone - 19-Mar-2020