What Is Car Depreciation, and Why Does It Matter?
New vehicles lose value quickly, and knowing why can help save you money.
The vast majority of vehicles aren't true investments. While a limited-edition Ferrari might appreciate like a Picasso, most cars, trucks, and SUVs will lose value over time, or depreciate. Understanding how a vehicle's value changes as it ages can be key to managing both your money and your expectations in terms of car depreciation. Here's what drives that decline — and how to minimize the impact on your wallet.
What Is Car Depreciation?
Depreciation is the reduction in a vehicle's market value after it's been purchased. As soon as a new car is sold, it's considered used, and what it's worth usually begins a downward trend. Several factors help explain why a car loses value over time. For example, vehicles are consumable assets subject to wear and tear. Along with mechanical degradation caused by normal operation, environmental factors such as rock chips, bird droppings, and careless parking jobs can all conspire to dull a vehicle's factory-fresh luster.
Even if a vehicle is kept in pristine condition, however, market forces can affect its value. When gas is cheap, for instance, buyers might be inclined to overlook the subpar fuel economy of a pickup truck with a powerful — and thirsty — V8 engine. But if that truck hits the used market at a time when fuel costs are soaring, potential owners might be spooked by the prospect of pain at the pump.
Overall, depreciation is the largest cost new owners will face with a new vehicle. While the math varies by vehicle, it's reasonable to expect a drop of around 20% in the initial year of ownership. For an average new vehicle, that means first-year depreciation can prove more costly than five years' worth of fuel.
How Fast Do Cars Depreciate?
While depreciation happens every year, the progression down isn't linear. The biggest value drop will usually be in year one, when a vehicle goes from being new to being used: Once you sign the paperwork at the dealership, you become the proud owner of a used car.
The chart below shows what percentage of its value a vehicle could be expected to maintain over a five-year period, based on data from industry experts.
| Year of Ownership | Value Retained % | Value Lost % |
| Year 1 | 79.5 | 20.6 |
| Year 2 | 69.8 | 30.2 |
| Year 3 | 61.7 | 38.3 |
| Year 4 | 54.7 | 45.3 |
| Year 5 | 48.7 | 51.3 |
Note that fluctuating market conditions — high gas prices, chip shortages, global pandemics — can add wild cards to the math. But over time, it's reasonable to expect most vehicles to lose value on pace with the outline above.
How to Use the Car-Depreciation Formula to Estimate Value Loss
There are two common methods used to quantify the cost of depreciation. The first is the straight-line depreciation method, which can be applied to everything from vehicles to appliances to computers.
To calculate your car's estimated depreciation, take its purchase price, including taxes and fees, subtract the salvage value (the price you can sell it for), then divide by the number of years it was used. Let's say you bought a vehicle for $35,000, used it for five years, then sold it (or traded it in) for $20,000. Run those numbers, and you'll find the vehicle lost an estimated $3,000 every year.
The declining-balance method is another common formula to determine depreciation. Given that depreciation of a new vehicle isn't linear (it's steepest in the first year and may depreciate by about 30% by the second year, according to industry experts), the declining-balance method is generally seen as better for predicting real-world car values.
| Year 0 (Purchase Price) | - | $35,000 |
| Year 1 | $5,600 | $29,400 |
| Year 2 | $4,200 | $25,200 |
| Year 3 | $3,850 | $21,350 |
| Year 4 | $3,150 | $18,200 |
| Year 5 | $2,450 | $15,750 |
To estimate your vehicle's likely depreciation, you can use a valuation calculator to approximate its current market value. Valuation models generally use a host of factors, including make, model, trim level, mileage, and condition, to determine a vehicle's worth.
Key Factors That Affect How Fast a Car Depreciates
When it comes to fending off depreciation — and retaining value — not all makes will be exactly the same. Picking a brand known for reliability by companies such as Consumer Reports and RepairPal, such as Honda or Toyota, could pay dividends when it's time to sell or trade in your vehicle. On the flip side, Jaguar and Land Rover have been associated with luxurious but less reliable vehicles. As a result, they're typically subject to higher depreciation.
Regardless of make, adding miles is usually a sure way to speed depreciation. In the United States, the Federal Highway Administration estimates the average driver covers about 13,500 miles annually. If you drive your car significantly more than that, the additional wear and tear is probably going to detract from its value. Mileage is such an important indicator of a vehicle's condition that rolling back an odometer is a federal crime.
Skipping maintenance can be another quick way to accelerate depreciation. When inspecting a potential buy, dealers and private buyers may naturally offer more for vehicles that seem to have been cared for. If there's no proof the vehicle got serviced at its recommended intervals, that could be a red flag.
Paint colors and options can also factor into how a car retains value. While today's roads might seem like a monochrome tapestry of white, silver, and black, a novel color can be an asset. A study from automotive search engine and research site iSeeCars reported that bold hues such as yellow, orange, and green kept depreciation at bay better than more conventional ones. Options-wise, base-level vehicles and fully loaded models tend to fare worse than sensibly equipped models in the middle of the range.
Additionally, luxury vehicles tend to depreciate faster than average, as do electric vehicles (EVs). If that leads you to suspect that luxury EVs are usually subject to accelerated depreciation, you'd be right. It's also important to remember that the classic rules of supply and demand also likely play a role in depreciation. Models in high demand, such as a Honda CR-V, may face lower rates of depreciation.
Car Depreciation: Which Cars Hold Their Value Best (and Worst)?
In the U.S., trucks and SUVs make up a large percentage of the bestselling vehicles on the market, which likely play a role in vehicle depreciation.
According to iSeeCars, trucks such as the Toyota Tacoma and the Ford Ranger tend to resist depreciation better than many other vehicles. According to the company's 2026 data, midsize trucks generally hold value better than their full-size counterparts.
When the study ranked just trucks by depreciation, seven of the top 10 spots in the data set were held by midsize pickups, including the Chevrolet Colorado, Nissan Frontier, and Honda Ridgeline. Of the full-size trucks that cracked the top 10, the Toyota Tundra ranked highest, at No. 2. The Ram 1500 and Ford F-150 came in at No. 9 and No. 10, respectively.
Also noteworthy is the strength of Toyota hybrids when it comes to value retention. Toyota's RAV4 Hybrid, 4Runner Hybrid, and Prius all cracked the iSeeCars Top 25 list.
Enthusiasts looking to justify a fun car purchase may also have reason to celebrate, as the Porsche 718 and 911 occupy the No. 1 and No. 2 spots on that list, while the Chevrolet Corvette comes in third. Even more affordable sports cars tend to hold value — the Subaru BRZ and Toyota GR Supra came in seventh and eighth, while Mazda's venerable Miata came in at No. 24.
The iSeeCars list of the 25 cars most affected by depreciation is packed with luxury vehicles, including the Land Rover Range Rover, BMW 7 Series, and Audi Q7. As noted above, electric vehicles also didn't fare well. The Nissan Leaf earned the dubious distinction of having the highest depreciation over a five-year period; Tesla earned three spots on the list; and the Kia Niro EV and Hyundai Kona EV were both members, as well.
When looking at rankings, it's important to remember that no brand is immune to depreciation. While Toyota sells many models that hold their value well, not every Toyota will be a superstar in that regard, just as not all sports cars have high resale values.
How Car Depreciation Affects Insurance, Taxes, and Your Finances
When considering depreciation, most folks focus on how it affects the dollar figure you can expect to get when you sell or trade in your vehicle. After all, this is when the impact of depreciation is most clearly felt: The more your car has depreciated, the less it'll fetch.
Even if you're not poised to sell, however, depreciation can affect your finances, particularly when it comes to insurance. Because vehicles are insured based on their value, rapid depreciation can put a driver in a situation where they owe more on the vehicle than it's worth on the open market. This is commonly known as being upside down on your car loan.
In the event of an accident where the vehicle is totaled, depending on your applicable policy terms, an insurance company may offer actual cash value — not the amount you'll need to replace it with a comparable vehicle. That's where gap insurance comes in; it can help cover the difference if your car is totaled. Adding gap insurance to your policy can mean slightly higher insurance premiums, however.
Business owners should know that the IRS allows a depreciation deduction for work vehicles. To qualify, the vehicle must spend most of its time being used for business purposes.
How to Minimize Car Depreciation and Protect Resale Value
For most cars on the road, depreciation is a "when," not an "if," you can minimize its effect on your pocketbook. The biggest impact comes from buying used, as the first owner absorbs the steepest depreciation, which typically happens in year one.
How your car is equipped can also influence its value. For example, some sports cars may command a higher price when equipped with a manual transmission, while in cold climates, all-wheel drive can bump the resale value upward. It's also worth noting that while a higher trim level might have more whiz-bang features, they won't necessarily translate to higher resale value; midlevel trims can be the sweet spot.
As you might expect, mileage is also a significant factor in how much value a vehicle retains. Generally speaking, the more mileage a vehicle has, the lower its value. So if you're a super commuter or a road trip fanatic, know that a high odometer reading will reduce your car's value.
Staying up to date with maintenance is another good way to help your car retain value. So when you have work done, keep the receipts for your records — they'll serve as your car's résumé when it's time for an upgrade. Enthusiasts should note that aftermarket modifications are unlikely to add value to your vehicle.
Should You Buy a New or Used Car With Depreciation in Mind?
From a fiscal perspective, the steep — and virtually inevitable — cost of depreciation could make a strong case for some drivers to go with a used vehicle. By letting the first owner absorb the initial drop in value, savvy shoppers may be able to score a great deal on a used car. Researching prices and determining when a vehicle has hit the bottom of its value curve is a great way to make depreciation work for you. Used cars, however, can come with a host of unknowns.
With a known history and full factory warranty, along with the latest tech and safety features, a new vehicle can provide peace of mind that's difficult to quantify. It also guarantees a level of personalization the used market can't match. With a new car, getting your desired color and option pack is as simple as checking option boxes. On the used market, it's not a guarantee.
For many buyers, certified pre-owned (CPO) vehicles could offer a happy medium. While you might not be able to spec a CPO car exactly how you'd like, the confidence of knowing it's been inspected and that its maintenance is up to date might take the sting out of not getting your first color choice.
There's no one-size-fits-all answer as to whether you should allow depreciation to impact your car-buying decisions. If you change cars the way other people change their shoes, it makes sense to dodge the initial hit and opt for a used model. But if you're happy spending the next decade driving the same ride, resale value might not matter as much.
Ultimately, what's smartest for you comes down to your budget, how long you plan to keep the vehicle, and how much you prioritize warranty coverage and customization over savings.
Frequently Asked Questions
What is car depreciation?
Depreciation is a term that describes how a vehicle, or any asset, loses value over time.
How do you calculate car depreciation?
Subtract the current market value from the vehicle's original purchase price, including taxes and fees. That figure is the amount the vehicle has depreciated
Which cars depreciate the fastest?
EVs and luxury vehicles generally depreciate the fastest.
Which cars hold their value the best?
Trucks tend to hold their value better than other types of vehicles. Sports cars can also hold their value better than average.
How can I reduce how much my car depreciates?
Buy used — let the first owner take the biggest depreciation hit. Stay up to date with maintenance and keep the receipts.
Originally published on March 27, 2018
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