Is There a Standard Car Depreciation Formula?
It's generally impossible for a formula to predict how quickly a vehicle will lose value. Here's why.
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While many car buyers might wish there were a singular, trusted way to predict how much value a vehicle might lose after it's driven off the dealer lot, there isn't a definitive standard car depreciation formula. This is because a number of factors play into a car's rate of depreciation, including model differences and market fluctuations.
Here's a closer look at how car depreciation works and what factors to account for when you're estimating a car's current value.
How Does Car Depreciation Work?
Car depreciation refers to a car's loss of resale value over time. The normal wear and tear from driving your car will push its price below what you paid for it.
If you want to know how much your vehicle has depreciated since you bought it, you can use an online car value tool to estimate its current value based on its condition and mileage. Then subtract that amount from what you paid for your vehicle (excluding sales tax and financing costs). The result should tell you roughly how much the car has depreciated.
Factors in a Car Depreciation Formula
You may be aware of most things that affect car depreciation: vehicle age, mileage, condition, fuel efficiency, reliability, and safety. You probably consider these factors when you're deciding which car to buy and how much to spend.
The state of the car market also affects depreciation. For instance, COVID-19-related manufacturing shutdowns and microchip shortages reduced the supply of available vehicles and pushed prices up during the pandemic. Cars depreciated more slowly as a result.
Sometimes the opposite happens. Certain makes and models can flood the market when numerous car leases end around the same time, causing those models to suddenly depreciate faster.
Seasonal trends matter too. Your car may be worth more during the spring and fall car-buying seasons than during the slower winter months, especially when considering convertibles and sports cars.
Why Isn't There a Standard Car Depreciation Formula?
Too many variables influence the value of each individual vehicle for there to be a standard car depreciation formula that applies across the board. Unfortunately, no tool can tell you exactly how well your car will hold its value.
You can get a snapshot of a particular car's depreciation through an online evaluation tool. However, there's nothing truly predictive or perfectly accurate about these models.
How Much Does a Car Depreciate Per Year?
A car's value is usually highest when it's brand new. In the first year that you own a new car, its value may drop by 20%, reflecting the value that drivers place on being a vehicle's first owner. Over the following five years, your car might depreciate by another 10% to 15% annually.
Different cars depreciate at different rates because of the factors explained above. It's common for a car to lose half of its original value in the first five years, yet some people — namely Tesla owners — have actually seen their car's price appreciate during the pandemic, an unusual situation related to a confluence of low supply, high inflation, and rising gas prices.
Strategies for Slowing Car Depreciation
You can't control all the factors that affect how fast your car depreciates, but there are some you can influence by doing the following:
- Buy used — let someone else take the big initial depreciation hit
- Perform regular maintenance — you can prevent parts from wearing out prematurely by following your car's maintenance schedule
- Keep mileage down — drivers typically prefer used vehicles with fewer miles because they're likely to have lower maintenance costs
- Drive carefully — accidents are not good for your car's value
- Choose a model that may be more likely to hold its value — some vehicles hold their value well and have a lower cost to own over the next five years
The 2021 analysis of 2016 model year vehicles by iSeeCars.com found the following models to depreciate the slowest over their first five years:
- Jeep Wrangler: 9.2%
- Jeep Wrangler Unlimited: 10.5%
- Porsche 911: 12.8%
- Toyota Tacoma: 13.8%
- Toyota Tundra: 19.5%
For comparison, the average five-year depreciation for all vehicles was 40.1%. Of course, the set of 2022 models that end up depreciating slowest could be completely different.
Final Considerations
There isn't a standard car depreciation formula, but experts can make educated guesses about how well certain models will hold their value. However, just as past stock market returns can't predict future investment returns, historical depreciation for a certain vehicle model can't predict how well newer models will perform.
