How to Make the Most Out of Car Depreciation?

Whether you’re thinking of buying your dream car or just something to get around or thinking of selling your vehicle, there’s an important concept all car owners should be aware of — car depreciation.

How to Use Car Depreciation to Your Advantage | Metromile

What is car depreciation? 

When you buy something of value at a certain price, it may not be worth that amount of money in the future. Not everything you buy is an “investment” that goes up in value. That’s certainly true with vehicles. 
Car depreciation refers to the loss of value that a car experiences over time. Vehicle depreciation happens right away — basically as soon as your wheels leave the dealership and get on the road. The car goes down in value through everyday use and normal wear and tear.  

Factors that can affect car depreciation include:

  • The vehicle make and model
  • The year the vehicle was manufactured
  • Supply and demand (consider the hot used car market we’re in now
  • The current mileage on your vehicle
  • Whether the car has been in an accident or needed significant repairs 
  • Overall condition of the car
  • How many previous owners the vehicle has had
  • The trust, safety, and reputation of the brand of car 

How to make the most out of car depreciation 

Car depreciation is practically a certainty. In other words, the value of your vehicle will go down over time (despite what we’re seeing right now with inflated used car values). There are ways to make the most out of vehicle depreciation and use it in your favor. 

If your car is a few years old and in good condition, you may be able to get a higher offer if you trade in your vehicle now than if you wait a long time. Generally, the lower the mileage and the better the condition of the car, the higher value it has. 

If you’re in the market for a new vehicle, you can use car depreciation in your favor and buy something just a year or two old with not a lot of miles on it. While not brand spanking new, it’s close enough and will be more affordable than a new car. First, it’s key to understand how vehicle depreciation typically works to understand why this is the case. 

How much does a car depreciate per year?

A common question is “How much does a car depreciate per year?” The answer may be more than you realize. According to Carfax, a new car loses 20% of its value in the first year. So a $40,000 vehicle after one year would be worth $32,000. 

After that plummet in the first year, the car typically loses about 15% of its value each year for the following four years. 

So in theory, if you want to buy a new-ish car, purchasing a one-year-old car could be 80% of the original new car price.

These are general benchmarks for vehicle depreciation though. How much a car depreciates depends on the many factors listed above and can vary from vehicle to vehicle. Given the “unprecedented” times we’re in now — with inflated prices everywhere and supply chain issues — the inflating value of the vehicle actually benefits current car owners. That may hurt buyers though. 

To get the most bang for your buck, consider certified pre-owned vehicles (CPOs), which must be certified by a dealer or a manufacturer. These cars must pass certain inspections and may offer additional incentives and warranties, making them a more affordable option with perks for most consumers. 

How to keep car depreciation in check 

Though car depreciation may be a fact of life, there are things you can do to keep it in check. How much your car is worth now might not matter, but if you intend to resell it later on or use it as a trade-in, you want to limit the vehicle depreciation as much as you can. Here are some things you can do:

  • Make sure your car is covered and protected. In other words, if possible, keep the vehicle in a covered garage to avoid theft, break-ins, damage from weather, and debris. 
  • Keep the car as-is. Making personal customizations to the car or painting it may be appealing to you, but not to prospective buyers. 
  • Have a regular car maintenance routine. Keeping your car in good condition can help and part of that means regular car maintenance. So keep a schedule to change your oil, check tire pressure, and be mindful of any odd smells or sounds that may impact the vehicle or signal a problem. 
  • Drive less. The fewer miles you have on your car the better. This is one effective way to curb your vehicle depreciation. It can also save you with your car insurance with pay-per-mile coverage
  • Get the most out of a private sale. Yes, you can always go to a dealership and do a trade-in. But if you want the most money for your car, a private sale may be your best bet. 

How does vehicle depreciation affect car insurance claims? 

Vehicle depreciation isn’t just something to be aware of if you’re looking to sell or do a trade-in. It also affects potential car insurance claims in the event of an accident. For example, if you total your car, the car depreciation will impact insurance claims and what you receive to replace or repair the vehicle. 
A car insurance company may use car depreciation and offer you the following as part of your policy:

  1. Actual cash value, which refers to what your vehicle is worth currently with car depreciation included. 
  2. Replacement cost, which refers to what it will cost to get an equivalent replacement car. 

Car depreciation and your policy can impact what happens and how much you get in the event of a total loss. If you financed your car, car depreciation also plays a role. 

For example, if you took out a car loan that is $30,000 but your car is currently worth $20,000 after depreciation, that can affect your car insurance payout if there’s a total loss. 

Let’s say you have $1,000 deductible and total your car. In that event, when filing a claim, your payout would be the value of your car with the deductible subtracted from it. So in this example, $20,000 minus $1,000, which is $19,000. But if your car loan is at $30,000, even with the $19,000 payout, you’d need to come up with $11,000 for the car loan. 

The bottom line 

Vehicle depreciation happens, but there are ways to make the most out of it as a consumer and ways to mitigate it to help when you’re a seller. Taking these steps can keep your car in tip-top shape and the value as good as it can be. Driving less is a key way to maintain the value, and if you do drive less, it’s possible to score additional savings through pay-per-mile insurance. You no longer need to pay a flat rate for car insurance regardless of how much you drive. Instead, you can be rewarded for driving less by paying less. Get a quote with Metromile today. 

Melanie Lockert is a freelance writer, podcast host of the Mental Health and Wealth show, and author of Dear Debt. She’s a cat mom to two jazzy cats, Miles and Thelonious, an amateur boxer, music lover, and needs coffee to function.