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How Do You Calculate Car Depreciation?

How Do You Calculate Car Depreciation?
Austin Kilham
Austin KilhamUpdated September 30, 2022
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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.
An unfortunate truth about buying a car: It starts to lose value as soon as you drive it off the lot. This is due to vehicle depreciation, which is the rate at which a car’s value declines over time.All cars depreciate. However, some lose their value at a faster rate than others. How quickly a car depreciates depends on a range of factors, including the type of car, how many miles you drive each day, as well as how well you maintain the car.Here’s a closer look at how depreciation works, including how to calculate it, why it’s important to know, and what you can do to slow down your car’s depreciation rate.

What Is Car Depreciation?

Car depreciation is the rate at which your car loses value over time. Unfortunately, the process begins almost as soon as you get behind the wheel. Indeed, just driving a new car home from the dealership results in a roughly 10% depreciation. That means if you paid $25,000 for the car new and re-sold it as soon as you got home, it would be worth $22,500.During the first year of ownership, cars tend to lose about 20% of their value. By the end of its fifth year, a car could have lost as much as 60% of its original value. Cars lose value over time due to wear and tear, age, as well as the arrival of newer designs and technologies on the market, which make older cars less valuable.

Importance of Calculating Depreciation on a Car

Paying attention to how a car depreciates is important for several reasons. One is that it helps you figure out how much you may be able to get for the car when it comes time to sell it or trade it in. The trade-in value  of your car is the amount of money a car dealer is willing to give you toward the purchase of a new car. It’s typically less than fair market value, because the dealer will need to be able to turn a profit on the sale of your old car. If you’re shopping for a car, understanding how quickly a certain car will lose its value can help you decide whether or not you want to buy it. And, if you have a car loan, understanding depreciation may help you avoid getting into a situation where you owe more than your vehicle is worth, which is referred to as being upside down on a car loan.Finally, if you hope to refinance your auto loan at some point in the future, depreciation can have an effect on the size of your car loan, as it will be largely based on the value of the vehicle.  

Car Depreciation Formula

Calculating your car’s depreciation is simple. First, you’ll need to find your bill of sale to determine exactly how much you paid for the car. The next step is to use an online valuation tool, such as Kelley Blue Book or Edmunds, to get an estimate of your car’s current market value. To find out how much your car has depreciated, simply subtract the car’s current value from the purchase price.

Yearly Car Depreciation Rates

Depreciation rates vary widely. According to a 2021 study by iSeeCars, the average car depreciation over the first five years is 40 percent. However, some cars depreciate considerably slower than that, while others depreciate even faster.Jeep Wranglers, for example, are known for retaining their value due to their durability, popularity, and iconic design (which doesn’t change from year to year), resulting in a 9.2% five-year depreciation rate. The BMW X5N, on the other hand, loses around 60% percent of its value over five years, according to the study.Overall, trucks and truck-based SUVs tend to hold their value the best, while electric vehicles and luxury sedans generally see the most depreciation.

What Factors Influence the Depreciation of a Car?

Below are some of the key factors that influence the depreciation rate of your car.

Condition 

How much wear and tear has been put on your car? Large exterior issues, such as scratches, dents, or broken tail lights can have a big impact on car value, as can issues with the interior, such as torn or stained upholstery. A car that’s in poor condition will generally face a larger loss in value than one in excellent condition.

Make and Model

Some car makes and models hold their value longer than others. This may be due to the car’s reputation for reliability, its safety features, its fuel efficiency, or other factors that make it more attractive to buyers. The more in-demand a car is, generally the less it will depreciate over time

Mileage

Typically, the more miles a car has been driven, the less it will be worth. That’s because the more a car has been driven, the more wear and tear it’s likely to have experienced, which can lessen the number of unused miles it has left.

Tips to Avoid Car Depreciation

Depreciation is not completely avoidable, but there are some steps you can take to slow down the process, and increase the value of your car when it comes time to sell it or trade it in.

Regular Maintenance

Keeping up with regular maintenance, like oil changes and routine servicing, can keep your car in good working condition. It’s a good idea to save all maintenance records so you can show potential buyers that the car has been in good hands.

Protect the Interior and Exterior

Keeping your car in a garage or other covered space can protect it from the elements and help preserve its paint job. It’s also smart to clean your interior regularly, and have your car detailed before you get a value estimate from a dealer. 

Buy Smart

Some cars depreciate more slowly than others. While these cars may cost more, the extra expense could be worth it if the car will hold its value well. Getting a great price on a new car can also help guard against steep depreciation. Prices are often lowest at the end of the season when new models are about to come out. 

Hold Onto Your Car Longer

Cars generally experience the steepest depreciation in the first five years. After that point, the depreciation rate decelerates. Because of this, you’ll feel the effects of depreciation less keenly if you own the car for a decade or so, rather than buying a new car every few years.

The Takeaway

Your car’s depreciation will affect how much it's worth when it comes time to sell it or trade it in. To help minimize the impact of depreciation, you may want to choose a car that is known to hold its value over time, purchase a pre-owned car (which has likely already gone through the worst of its depreciation), watch your mileage, and take excellent care of your car.

3 Auto Loan Refi Tips

  1. Refinancing your auto loan could lead to lower monthly car payments and more money in your budget. Lantern by SoFi can help you find the right auto refi loan for you.
  2. Shortening the term of your auto loan may increase your monthly payments, but you’ll likely pay less in interest over the life of the loan.
  3. Generally, the newer your car, the lower the refi interest rate. This is because younger cars typically have a higher value than old or used cars — and the car serves as collateral for the loan. 

Photo credit: iStock/eyecrave productions
The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.LCAU0722003

Frequently Asked Questions

How Much Does a Car Depreciate Yearly?
How Do You Calculate Depreciation on a Car?
Why Is It Necessary to Calculate Car Depreciation?

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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