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What Is Car Depreciation? Definition & Examples

What Is Car Depreciation? Definition & Examples
Kelly Boyer Sagert

Kelly Boyer Sagert

Updated October 19, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Car depreciation is something you may not think about until it’s time to refinance, sell, or trade in your vehicle. Even once you consider the concept, it can be confusing. What is vehicle depreciation, really? How does it impact you, as the owner of the car? Do all cars depreciate in the same way?This article will define depreciation and provide concrete examples of how it happens. 

What Is Car Depreciation?

Think about buying a vehicle, whether new or used. You select a car, sign the paperwork, and get the keys. Excited about the purchase, you drive out of the dealer’s parking lot, eager to show the vehicle to friends and family members. It is exactly at that moment, though, that vehicle depreciation kicks in. Simply put, depreciation is the steady loss in the value of your car, and it can continue throughout the entire time you own it.This naturally raises questions, including why this happens; how much a car depreciates annually; and what cars depreciate the quickest and the slowest. Given that cars depreciate, how much is yours currently worth? What impact will that have if you’re interested in selling the car? Or refinancing the vehicle? Let’s dig in to answer those questions about depreciation and more. Recommended: Car Loan Terms Explained

Why Do Cars Depreciate in Value?

The concept of automobile depreciation is connected to the vehicle’s resale value.Think of it this way. If you bought a brand-new car on the first of the month and tried to sell it back on the 15th of the same month, you wouldn’t get the same amount of money that you originally paid for the vehicle. Why? Because you bought a new car and would be selling back a used one. That’s just the reality. The car’s resale value is less than its original sale value. That’s depreciation.Secondhand cars are also subject to depreciation, although at a lesser rate. But when you’re focusing specifically on new cars, there’s another reason that they depreciate. Models come out annually, typically with new features and technologies. That means that last year’s model quickly becomes outdated. Furthermore, for both new and used cars, as more time goes by, more wear and tear occurs, more miles are put on the vehicle, and more maintenance and repairs are needed. All of that leads to even more depreciation. 

How Much Does a Car Depreciate Each Year?

Looking specifically at new car depreciation rates, a 2020 study by iSeeCars notes that not all of them depreciate on the same timeline. Sports cars, to take just one example, tend to depreciate more slowly than luxury sedans. That said, after analyzing more than 8.2 million car sales, iSeeCars came to the conclusion that the average new car will lose nearly half of its value after just five years. This makes depreciation the single greatest “cost” of owning a vehicle. To break it down a little more, a brand-new car typically loses 9 to 11 percent of its value as soon as it’s driven off the lot. After a year, about 20 percent of its value is lost to depreciation.There are, of course, vehicles that depreciate less than the average amount, and an iSeeCars executive analyst advises that, if someone plans to sell a car within the first five years of ownership, then picking one that maintains its value (i.e., depreciates less) is a smart financial strategy.

Cars With the Highest and Lowest Rates of Depreciation

There are several ways to consider this issue. When it comes to the lowest rates of depreciation, Kelley Blue Book—a vehicle valuation and research company—has listed these five vehicles as the 2021 Best Resale Value Cars:
  • Subaru Impreza: Best Compact Car
  • Toyota Camry: Best Midsize Car
  • Chevrolet Corvette: Best Sports Car
  • Lexus IS: Best Entry-Level Luxury Car
  • Lexus LS: Best Luxury Car
The iSeeCars study lists the following as vehicles with the lowest depreciation:
  • Jeep Wrangler Unlimited
  • Toyota Tacoma
  • Jeep Wrangler
  • Porsche 911
  • Toyota Tundra
The cars with the greatest vehicle depreciation in 2021, according to Cars.USNews.com, are as follows:
  • BMW 7 Series
  • BMW 5 Series
  • Nissan LEAF
  • Audi A6
  • Maserati Ghibli

What’s Your Car Worth?

Online car valuation resources that take depreciation value of cars into account while estimating what a car is worth include:

When Do You Need to Know About Depreciation?

There are a number of scenarios in which depreciation plays a factor.

When You Want to Trade In a Car

When you’re planning to trade a car in to help finance another vehicle, the dealership will make an offer that takes into account your trade-ins depreciation. Not every dealership will make the same offer, though, so it can help to compare a few offers.

When You Want to Refinance an Auto Loan

A vehicle’s value also comes into play when you’re refinancing. Lenders will look at the loan to value (LTV) ratio associated with your vehicle when they review the refinance application. LTV is the total dollar value of the loan (in this case, the refinance loan) divided by the vehicle’s actual cash value. Example: If someone wants to refinance a vehicle with a loan amount of $8,000 and it’s worth $10,000, then that vehicle has an 80% LTV. If, in this example, a financial institution would loan up to 80% on a car refinance, then this vehicle and loan would fall within those parameters. If the loan amount was $9,000, however, that would be an LTV of 90%, which doesn’t fit within what our theoretical financial institution would refinance.So, when you’re shopping for an auto loan for a refinance, it’s important to look for ones with an LTV that works for your situation. Also pay attention to the car loan interest rates being offered on refinances, as well as the annual percentage rates (APRs). Other issues to compare include loan repayment terms, loan fees such as origination fees and any prepayment penalties, and any closing costs.When considering what term you might want on a refinance, take a look at the average car loan length. How well would a payment calculated on that term fit into your budget? If the payment would be too high, you could see if you can get a longer term. That would reduce the payment amount but would also increase the overall interest paid unless you end up paying off the car loan early.One situation that can get more complicated is when you need to refinance an upside down auto loan. This term refers to a situation in which the car is worth less than the outstanding loan balance. It can also be more challenging to get the right deal when you’re  refinancing your auto loan with bad credit and in that situation it may take more time to find the right lender. 

The Takeaway

Cars depreciate from the moment they’re driven off the dealer’s lot. But depreciation occurs more quickly with some vehicles than others. For example, new car depreciation takes place more quickly than depreciation on used ones and luxury sedans lose value more quickly than sports cars. There are easy ways to get a general value of your vehicle that takes car depreciation rates into account. This becomes important when you’re selling or refinancing the vehicle.Even if your situation is complicated, if you’re thinking about a refinance, consider exploring auto loan refinancing with Lantern by SoFi. You fill out just one short application and then receive a selection of refinance offers from our network of lending partners.
Photo credit: iStock/FotografiaBasica
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About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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