Understanding car depreciation
Fact: All vehicles lose value over time.
According to sources such as Kelley Blue Book Canada car depreciation impacts every vehicle, whether you buy it new or used.
It’s the difference between how much your car was worth when you bought it and what it’s worth when you sell it. The value goes down over time with daily wear and tear.
How much does a vehicle depreciate per year?
New vehicles lose value almost immediately. The largest depreciation happens when you drive it off the lot. Some cars can lose 20 per cent in the first year. And a car will continue to depreciate as it ages, though the rate of depreciation slows as years pass. By the fifth year of ownership, it may have lost up to 60 per cent of the original value.
If you purchase a used vehicle, it won’t depreciate as fast as a new one. However its value may be lower.
Generally, luxury vehicles depreciate faster than lower-priced models because they are often more expensive to maintain. Many of those buyers lease luxury cars, which helps ensure a supply in the used market.
In addition, electric vehicles also depreciate more quickly because the technology is relatively new. A lack of a charging infrastructure also makes EVs a non-starter for some drivers.
That being said, depreciation varies from vehicle to vehicle.
RELATED READING: Studies show that new cars depreciate 20-30% per year
What impacts depreciation?
Several factors impact your vehicle’s value over time. Some you can control, others you cannot. Car and Driver and other experts boil it down to this:
- Your driving habits. The more you drive, the less it’s worth by the time you sell it. The higher the kilometres, the more it will impact the final price.
- Condition of your vehicle. If the vehicle hasn’t been involved in an accident, have outstanding repairs and there’s no damage to your car’s exterior/interior, it helps keep the price up.
- Gas mileage. As gas prices continue to fluctuate, your car's value can be affected. Due to rising fuel costs, many drivers today want vehicles that are fuel sippers rather than gas guzzlers.
- Consumer tastes. As with fashion or decorating, what’s “in” changes. Some years, people prefer sedans. Others, SUVs. Does it have a more up to date entertainment system? More popular car models won’t depreciate as fast.
- Brand reputation/model. Some brands and body styles hold up better over time. Has the vehicle had a lot of recalls or is it known as a “lemon.” Alternatively, if it’s viewed as a solid, safe vehicle with few problems its value will hold up better.
- Other factors. This can include after-market additions (winter tires, roof racks etc.), multiple owners, condition of tires, gaps in service history, whether the vehicle has been smoked in, exposure to the elements and more.
How is depreciation calculated in insurance?
Insurers calculate the actual cash value of a vehicle by considering its age, kilometres driven, make and model, fuel economy, and wear and tear. Older vehicles lose value over time as new models come on the market.
Of note, in Ontario for example, your insurer may not cover car depreciation after a crash. Check with your broker whether your policy compensates you for the diminished value.
Gap insurance, for example, is an optional coverage that makes up the difference between what a person owes on a vehicle and its actual cash value if there’s an accident and it’s declared a total loss. Often offered by dealerships, it’s a good idea for vehicles that depreciate quickly or with long car loan terms.
How to assess your vehicle’s value
There are many ways to research the value of your car. You can visit a site such as Autotrader.ca and put in your Vehicle Identification Number and trim level. With your VIN, Carfax Canada will also provide a report on its value including reported accidents, whether there’s a lien on the vehicle, last odometer readings and more.
Canadian Black Book also has a trade-in estimator or a dealer can also make you an offer. It’s recommended you do your research first before selling.
Bottom line? Depreciation happens to every vehicle owner, but you can minimize its impact by choosing the right make and model, being a responsible driver and keeping your vehicle in tip-top shape.