Car depreciation and what it means when leasing

What is car depreciation and what does it mean when leasing?

Simply put, depreciation refers to the rate a car falls in value over time and therefore quantifies the difference between the price of a car when you bought it to when you choose to sell it. 

It is something that affects almost all cars. Besides rare classics or unused sports cars, it is unlikely that a car will ever be worth more than it cost at the time of purchase. 

Depreciation levels vary from model to model so it is an important consideration to make when hunting for your next car.

1. What affects car depreciation?

There are many things that affect depreciation levels; some of them to do with the car's make, model and specification, others to do with vehicle usage and maintenance:

Mileage 

The more miles on the clock, the less your car will be worth.

Previous owners

The greater number of previous owners, the perceived greater potential for things to go wrong.

Warranty and service history

The more warranty that is left on a vehicle when it is being sold, the higher its resale value. Vehicles that have a complete service history with work carried out exclusively at the main dealer will also retain a higher value.

Brand and model

The reliability and desirability of the brand and model of car will greatly affect it's depreciation rate. Popular brands with a strong reputation will have a greater pool of potential buyers and therefore will retain their value better. Newer models or designs are more likely to hold their value, as will those registered with the latest date tag on their number plate (soon to be the 69 plate).

Fuel economy

Smaller, more fuel efficient cars cost less to run and therefore appeal to a larger community of buyers. This demand means these cars tend to depreciate less compared to those with high fuel and emissions levels.

Safety tests

Positive results in safety tests and ratings, as well as safety accolades, will lessen a car's depreciation. The opposite can be said of widespread faults and recalls or known but unresolved issues with the car itself.

Compliance

Cars that are compliant with the latest regulations, especially those regarding the environment, will retain their value better than those that are not.

Condition

As with all things we buy, cars become worth less once they have been used. This is due to the increased vulnerability of repair but also to reflect the nicks and scrapes picked up along the way. If your car is in bad condition you can expect it to be a lot less valuable than the same car in pristine condition.

2. Average vehicle depreciation figures

The biggest drop in your car’s value will take place within the first 12 months and tends to bottom out after ten years where it is likely to stay at roughly 20% of its original value.

Year 1: 65 – 85% of original value
Year 3: 40 – 65% of original value
Year 5: 30 – 40% of original value
Year 8 – 10: 20% of original value

Therefore, for all the benefits that come with owning a new car, there is certainly a financial loss involved compared to buying used.

Beyond just the costs outlined here, it is important to understand the true and current value of your car for insurance purposes. Get this wrong and you could be over paying for your insurance or, on the other hand, it could mean that you don't receive the expected payout in the event of an accident.

3. Which cars depreciate the most?

We know this will be the question on everyone's lips at this point. 

However, it is an ever-changing picture due to social and economical factors that constantly redefine driving standards and trends. 

However, in recent years SUV's are shown to maintain their value well due to their growing popularity. This is alongside hatchbacks and those within the luxury, sport and executive bracket which historically depreciate at a slower rate.

4. Which cars depreciate the least?

• Land Rover Defender
• Mercedes G-Class
• Porsche Taycan
• Volkswagen Multivan
• Ford Ranger
• Jeep Wrangler
• Audi Q5
• Porsche 911 Cabriolet

If you want a car that doesn't lose much value over time, then you'll want to consider one of the vehicles listed above. 

5. Why is depreciation important when leasing?

Depreciation levels are outlined clearly for you when you are considering a lease as the rates you will see are based on covering the depreciation costs of the vehicle over a set term. 

For this reason, leasing can provide the opportunity to drive away a better car at a better price than other funding methods and without the initial investment of buying outright. 

In many cases, you will find that you will pay less for a lease than you would if you bought a car and then sold it after the same period because depreciation levels are agreed at the outset. You also don't have to worry about the hassle of selling the car after a few years.

However, because your lease fee will be dependent on the value of the car at the end of your term, you will be obliged to agree to a set mileage at the outset of your agreement. If you exceed this figure you will face penalisations when you hand the car back. 

There is also the understanding that general wear and tear is expected during normal driving over a lease term. But to going beyond these agreed levels will also incur extra charges at the end of your lease to cover repairs.