Vehicles lose their value over time. However, the rate at which they do so varies. The depreciation rate of some vehicles can be much higher than others. Generally, a vehicle can lose around 10% of its value as soon as it’s driven out of the dealership. After three years, a vehicle can lose around 50% of its total value. A vehicle doesn’t lose 50% of its functionality or reliability after that period of time, but why does it lose so much of its worth?
What Is Car Depreciation?
Car depreciation is how much your car loses its value over time. The average depreciation rate of a car is 20% for its first year, then it’ll lose around 15% every year until the four- or five-year mark.
It’s true that vehicles depreciate fast, but they’re still worth a lot after many years. Talking about how a vehicle depreciates is important because some vehicles depreciate faster than others. When choosing a vehicle to buy, it’s important to consider how a vehicle will lose its value over time.
Why Used Cars Depreciate Fast
The Perceived Value of a Used Vehicle Decreases Quickly
People are much more willing to pay for a new vehicle. Newer vehicles will have the latest features and looks. Newer vehicle models can also offer the best performance and efficiency. These selling points make a brand-new vehicle more desirable and therefore allows it to fetch a higher price. Aside from the physical benefits, a new vehicle also gives its owner a sense of prestige. What does this have to do with used vehicles depreciating fast?
People’s outlook on a vehicle or desirability is everything when it comes to determining its value. After a vehicle has been purchased, its desirability tends to decrease very quickly. Just having a used label will make it a lot less desirable, even though the vehicle might not have much signs of use or wear. A vehicle’s perceived sense of prestige can drop even after just being used for a short amount of time.
To some extent, a person was willing to pay for a new vehicle partly because of marketing that gave the brand-new vehicle an elevated sense of value. Without the selling points elevating its value, the vehicle is perceived more like any other everyday vehicle or a kind of appliance. This might be a main reason why luxury vehicles tend to lose value much faster than regular vehicles.
Used Cars Are Seen as Less Reliable
One concrete factor that can determine a vehicle’s depreciation is its mileage. High-mileage vehicles are going to be seen as more used. And a used car is going to be viewed as less reliable since it tends to have more worn-out parts that can cause breakdowns.
Parts and consumables like tires and engine oil are changed regularly. However, there are some parts like shock absorbers, timing belts, and hoses that usually require replacement after several years. There are also some parts like the alternator and timing belt that don’t typically wear out but are more likely to fail over time. Body panels can also rust and get damaged. Pretty much anything in a vehicle can fail over time.
An older vehicle will generally require more work to stay reliable. Hence, people are less willing to pay full price for an item that will be more difficult for them to own. This is one of the main reasons why a vehicle depreciates.
Gas Prices and Fuel Consumption
Gas prices can sometimes play a role in a vehicle’s resale value. During a gas crisis where gas prices are high, vehicles that are fuel efficient are going to shoot up in value because they’re cheaper to run. During these periods, gas-guzzling vehicles tend to depreciate more since people are disincentivized to purchase a vehicle.
A vehicle’s gas consumption can also cause it to lose value. If a vehicle is a gas-guzzler, it’s going to depreciate more when gas prices go up. Meanwhile, an efficient vehicle won’t be affected by gas prices as much since potential buyers won’t have to worry about expensive running costs.
Supply and Demand
Just like any other good, supply and demand also affects a vehicle’s resale value. If a lot of people desire a specific model, then its price is likely to shoot up. This is probably why some sports cars manufactured in limited quantities typically shoot up in price. Meanwhile, most other vehicles normally depreciate because they’re mass produced.
Accidents and Issues
Some vehicle models are known to develop major engine or transmission issues which require a lot of time and resources to repair. There are also some vehicles that get into more accidents than other vehicle models, perhaps because of an issue with their design. These vehicle models are headaches just waiting to happen. When vehicles garner these reputations, there will be less people willing to purchase the vehicle model and it’s going to be worth much less than a vehicle model that’s known to be reliable.
Why Do Luxury Vehicles Depreciate So Fast?
Luxury vehicles might depreciate fast because of a combination of all three previously mentioned reasons. A luxury vehicle has more perceived value because of its brand, especially when it’s brand new. Over time, a luxury vehicle will shed more of this value since it’ll be seen closer to a regular everyday vehicle. However, it’ll still be worth a little more than a regular vehicle since it still has some brand prestige.
At the same time, luxury vehicles can depreciate more because many luxury vehicle brands aren’t perceived to be as reliable as some other brands. Hence, used luxury vehicles will also be perceived as less reliable and more expensive to own, which further lowers their resale value. Lastly, many luxury vehicles have more powerful engines to provide high performance and a good driving experience. This can make some of them gas-guzzlers, which further lowers their market value.
Overall, depreciation is something that can be predicted, but never precisely. There are platforms and websites that let you easily research a vehicle models’ current market price. But identifying all the small reasons that affect a vehicle’s resale value and depreciation is difficult since it can be quite subjective. A vehicle’s rarity, mileage, and all sorts of whims and notions are all going to affect its value. Nevertheless, depreciation is something that any vehicle owner should keep in mind when owning or buying a vehicle.
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