How much does a car depreciate per year?

Whether you're purchasing a brand-new car, leasing a vehicle, or buying a used car, one of the most important financial factors to consider is car depreciation. As soon as you drive off the dealership lot, your vehicle will start to lose its value. This depreciation rate affects not only your vehicle's resale value but also your car insurance policy, and more. Understanding how depreciation works can help future car buyers make informed decisions and avoid losing thousands of dollars over time.

All cars are different, which means that depreciation can affect different vehicles at different rates. For example, according to the Driver's Book, electric vehicles (EVs) tend to appreciate quickly after the first five years, with depreciation rates of 49%, which is slightly more than the rate of luxury vehicles, which sits at 48%. In contrast, sports cars, such as the Porsche 911, depreciate around 22% over five years, meaning they tend to hold their value better over time. To learn more about scar depreciation, read through our comprehensive guide below.

What is car depreciation?

Car depreciation represents the gradual decline of a vehicle's initial value over time. Several factors can affect a car's value, including its mileage, general wear and tear that comes with age and usage, technological advancements, market fluctuations, and more. Research shows that vehicles lose their market value rapidly within the first couple of years of ownership, with the largest drop in value occurring within the first year. Let's look at an example of how car depreciation works:

Let's say you just purchased a brand-new car from a dealership for $30,000 all in. Depending on the car model, your vehicle may depreciate 20% within the first year, reducing its value to $24,000. After five years, this value may drop even further, making your now-used vehicle worth $15,000 or less, depending on how well it's been taken care of. When we're talking about car depreciation, there are two categories it can fall into:

1. Natural car depreciation

Natural car depreciation is as it sounds and results from regularly using your vehicle, which causes wear and tear, and its components to age.

2. Market-driven car depreciation

Market-driven car depreciation occurs as a result of shifts in the automotive market. For example, driver preferences can change, economic factors can influence buying decisions, and brand reputation all need to be considered.

Average car depreciation rates: what happens to your car's value in five years

As we mentioned, the rate at which a car will depreciate varies significantly based on the type of vehicle, the manufacturer, and local market demand. Let's take a look at the average depreciation rates for various vehicle types within the first five years:

• Electric vehicles (EVs): 49%

• Hybrid cars: 40%

• Luxury vehicles: 48%

• Sports cars: 22%

• Pickup Trucks: 34%

• SUVs: 39%

Now, let's calculate a hypothetical year-to-year car depreciation breakdown and how it would look for a brand-new car that was purchased for $55,000 below:

New car depreciation rates for popular vehicles

According to iSeeCars, potential car buyers can anticipate the following car depreciation rates for the following popular vehicles:

Jeep Wrangler

Unlike other vehicles, Jeep Wranglers have a surprisingly strong resale value. If you were to purchase a new model today and sell it five years later, the vehicle would depreciate at an estimated 30.6%.

Toyota Tacoma

The Toyota Tacoma is also a vehicle that retains its value well over time, with an approximate depreciation rate of 24.8% over five years.

BMW 7 Series

In contrast, the BMW 7 Series and other similar cars tend to depreciate more quickly. For example, after five years, this vehicle will depreciate around 65.7%, which is one of the highest rates compared to other five-year-old car models.

Honda Civic

Car Edge reports that the Honda Civic has a depreciation rate of approximately 31%, similar to the Jeep Wrangler, meaning you would get a pretty good resale price should you decide to buy a new car after five years.

Ford F-150

Ford F-150s are a type of vehicle that sits in the middle of the pack when it comes to depreciation. You can expect this truck model to depreciate around 51% in the first couple of years ,according to Car Edge.

Factors affecting car depreciation

Now that you have some insight into how quickly cars depreciate in value and by how much, let’s dive into some of the factors impacting depreciation:

1. Your car's mileage

The number of miles you’ve racked up on your car is a major factor in determining its worth. The more miles you drive, the more your car will depreciate. Why? Most vehicles’ lifespans are measured in kilometres, with 400,000 kilometres often being the maximum.

So, if you drive your car more frequently or often take long road trips, you can expect its value to depreciate faster than someone who only drives their car occasionally. Contact BrokerLink to learn how to calculate mileage.

2. Car brand reputation

The make and model of your car are other factors that can impact its value. Certain brands and types of vehicles have a reputation for retaining their value better than others. Brands like Toyota and Honda have strong resale values due to their reliability and safe features. This is in contrast to an automaker like BMW, which has one of the highest rates of depreciation.

3. Maintenance

Well-maintained vehicles hold their value better than cars that are neglected. If your car is in poor condition, such as if it has a cracked windshield or lots of scratches or dents, your car will be less valuable than if it is in tip-top shape. Repairing your car when needed and scheduling annual maintenance check-ups can help your car retain its value.

4. Technological advancements in the auto industry

If an auto manufacturer introduces a brand-new model of an existing car, and the new model has major upgrades or improvements, the old version of that model will typically depreciate instantly.

However, on the flip side, if a certain model is discontinued, the older models will depreciate more slowly and retain their value for longer.

5. Market demand

Market demand can vary between Canadian provinces and cities. For example, those living in Edmonton may prefer to have an SUV or Truck, given that the area experiences heavy snowfall throughout the wintertime.

Those living in the cities of Vancouver or Toronto, on the other hand, may opt for a smaller, more fuel-efficient model due to high traffic congestion and highway driving. Because of the differences in demand, a car's depreciation rate can fluctuate across Canada.

6. Fuel efficiency

Vehicles with lower fuel consumption tend to retain their value better than used cars with higher consumption rates, given the rising costs of fuel across the country.

7. Car modifications

One final factor that affects depreciation is whether you made any customizations to your car. Although you might think that the customizations you made are an upgrade, adding a noisy muffler or painting your car an eye-catching colour can actually have the opposite effect.

Tips to minimize car depreciation

If you've recently purchased a new car and want to maintain your car's value as much as possible over time, there are ways you can slow down how much your cars depreciate by doing the following:

Opt for a used car or certified pre-owned vehicle

If you're still deciding whether to purchase a new car or a used car, you may want to opt for a certified pre-owned model. Used cars have already undergone most of their car depreciation, depending on how old they are, which means depreciation won't really affect your car's value as it moves forward.

Keep your mileage low

Minimizing how much time you drive can also impact the value of your car. Remember that your mileage is one of the biggest factors that contribute to depreciation, so the fewer miles you rack up, the better off you will be when it comes time to sell.

Properly maintain your car

It goes without saying that maintenance appointments are an excellent way to keep your car in tip-top shape. Schedule a maintenance check-up at your local dealership or auto body shop every year. When your car goes in for maintenance, a professional will examine it for any issues, as well as change the oil, top up the fluid levels, check the brakes, and more.

Opt for reliable car brands

Remember, some cars depreciate more quickly than others, especially luxury vehicles and sports cars. If you're looking to buy a car and minimize car depreciation, opt for a reliable brand like Toyota or Honda.

Sell or trade at the right time

Car depreciation occurs exponentially in the first few years of vehicle ownership. To get the best return on your investment, consider buying or trading in your car before it hits the five-year mark or before you've reached 100,000 kilometres on it.

Car depreciation and car insurance

Car depreciation can directly influence your car insurance premiums and payouts following an accident. Insurance companies base their payouts using either an actual cash value (ACV) or replacement cost value (RCV) model, also known as waiver of depreciation. Actual cash value accounts for depreciation, whereas replacement cost does not. Thus, actual cash value represents the cost of replacing an existing item, with depreciation factored in, and replacement cost represents the cost of replacing an existing item with a brand-new item.

Since replacement cost does not take into account depreciation, the insurance payout is likely to be much higher in the event of a loss. However, your insurance premium will also be higher, since you are paying for the added financial security. If your insurance company offers you an actual cash value policy, you may want to purchase gap insurance for your new car, especially if you have a car loan. Gap insurance covers the difference between your loan balance and the car's depreciated value. For example, if your new car of $40,000 depreciates to $32,000 in a year and you still owe $36,000 toward your loan, this coverage will cover the $4,000 shortfall if you get into an accident that renders the vehicle a total loss.

Contact BrokerLink today!

Understanding car depreciation is essential for potential buyers or if you're selling a car, as it impacts resale values, insurance costs, and your overall financial decisions. At BrokerLink, we help customers find affordable car insurance in Ontario and other provinces. Our brokers can help you shop around, unlock car insurance discounts, and answer any questions you have. Contact us directly to start your insurance journey or use our online quote tool today!