How much does a car depreciate per year?

12 minute read Published on Nov 14, 2023 by BrokerLink Communications

The hood of the white car with the yellow leaves of the trees

Anytime you buy a new car, it’s important to consider factors like depreciation, especially when you subsequently purchase car insurance. This article goes into detail about the topic of depreciation, outlining how much you can expect your car to depreciate each year and how insurance companies calculate a car’s value.

Car depreciation explained

Whether you’re buying a new car or buying a used car, you will need to take into account the rate of depreciation that the car will go through. Cars depreciate faster than almost any other item, with a car’s value decreasing significantly over time - even as soon as one year after it was purchased. Depreciation is the amount that an item’s value goes down by, and there are several ways of calculating this.

First off, when talking about car depreciation, it’s important to understand exactly how much you can expect your car to depreciate before eventually selling your car. For example, if you buy a new car for $40,000 and sell it after six years, you should prepare for the reality of that car only being worth $20,000 by the time you decide to sell. This means that you would have essentially spent $20,000 on the car to own it for six years. This large gap in the purchase price and the eventual sale price isn’t the same for all cars.

For instance, the rates of depreciation for new cars is vastly different than that of used cars. If you bought a five-year-old used car for $20,000, it would have already gone through several years of depreciation. Thus, when you decide to sell it in another five years, it may still be worth $10,000. This equates to a cost of $10,000 for five years of ownership as opposed to $20,000 for five years of ownership with the new car.

Depreciation rates for new cars

The reality is that new cars depreciate much faster than used cars. This is due to the fact that cars tend to depreciate the most in their first year of driving. Generally speaking, the average car depreciates by 10% as soon as it's driven off the lot and then by another 10% to 20% after one year of driving. Depreciation rates get even steeper after that, with cars depreciating roughly 15% to 25% in subsequent years. This amounts to a car’s value depreciating by more than 60% after just five years of ownership. This high level of depreciation can spell trouble for those who take out long-term car loans.

Depreciation rates for used cars

Given how much cars depreciate in the first year of ownership, buying a used car, even one that’s just one year old, can save you a lot of money in depreciation - up to 30%, to be exact. By purchasing a used car that is only two or three years old, you will not only end up paying less than you would for a new car, but you also get to retain far more value when you decide to sell, as the difference between the purchase price and the selling price will be smaller than if the car was new.

Factors impacting 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. You are probably wondering why cars depreciate so fast. That is what we cover below:

Your car’s mileage

The amount of kilometres you’ve racked up on your car is a major factor in determining its worth. The higher your mileage, the more your car will depreciate in value. This is due to the fact that most vehicle’s lifespans are measured in kilometres, with 400,000 kilometres often being the maximum. Thus, 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.

The make and model of your car

The make and model of your car is another factor that can impact its value. Certain brands and types of vehicles have a reputation for retaining their value better than others. For example, electric and hybrid cars are known to depreciate faster than gas-powered cars. Meanwhile, sports cars, SUVs, and trucks may depreciate slower than other types of cars over five years. Lastly, brands like Toyota and Jeep are known for their longevity, garnering some of the slowest rates of depreciation. This is in contrast to an auto maker like BMW which has one of the highest rates of depreciation.

New cars featuring upgrades

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 slower and retain their value for longer.

The car’s condition

The condition of the car is yet another factor that influences its depreciation. 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.

Any customizations

One final factor that affects depreciation is if 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. In fact, studies have shown that cars with customizations depreciate even quicker.

How insurance companies calculate the value of your car

Depreciation matters - not only when it comes time to sell your car but also when it comes time to insure it. Since Toronto car insurance is mandatory, you must purchase auto insurance coverage if you plan to drive your car. Without it, you would be driving illegally, and that can have serious consequences, like fines, vehicle impoundment, jail time, and the suspension of your driver’s licence. For this reason and others, drivers in Canada choose to purchase car insurance. However, knowing what insurance to buy and what limits to select can be difficult.

Further, in the event of a claim, such as if your used car was in an accident, you would want to know how much money you would receive for it. That’s where the calculated value comes in.

If you are involved in a car accident, and your car is damaged, your insurance company will calculate the value of your car when issuing a payout. The payout you ultimately receive will depend on this valuation, as well as whether you have an actual cash value or replacement cost policy. We explain both types of policies below, as well as how insurance companies calculate depreciation for actual cash value car insurance.

Actual cash value car insurance and replacement cost car insurance explained

Actual cash value and replacement cost, also known as waiver of depreciation, are two methods that insurance companies use to calculate the value of a policyholder’s vehicle. The key difference between them is that 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.

As you might suspect, 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. In contrast, the payout a policyholder may receive through actual cash value coverage would be less, as depreciation according to several factors, like condition, mileage, model, and more, would all be considered and deducted from the value of the vehicle. The benefit of actual cash value coverage is that it is cheaper to add to your policy than replacement cost coverage.

Actual cash value vs. replacement cost

To provide further insight into how actual cash value car insurance differs from replacement cost car insurance and the role that depreciation plays, take a look at the following example:

Your vehicle is totalled in an accident, and you call your insurance company to let them know what happened. They walk you through the steps of filing a claim and assign an insurance adjuster to your case. The adjuster reviews the claims form you filled out and the evidence you provided, like photos, videos, and the police report, and schedules an in-person visit to inspect your vehicle. The adjuster then assigns a value to your vehicle and determines whether it’s a write-off or not. Since your car has been totalled, let’s assume it’s a write-off.

If your car insurance plan features actual cash value coverage, the insurance adjuster is tasked with determining not only the value of your car before the accident but also the rate of depreciation. This means that even if the adjuster calculated your car’s worth to be $20,000 pre-accident, the payout you receive from the insurance company is likely to be far less than this due to depreciation.

As mentioned above, research indicates that cars depreciate upwards of 20% in the first year of ownership, averaging roughly 60% depreciation in the first five years. This means that even if your car is only one year old, the adjuster will immediately deduct up to 20% of its value. However, this percentage could be even greater, depending on other factors, like its condition, mileage, customizations, make and model, etc. If the adjuster ultimately calculates the depreciation as 20% on your $20,000 car, then you can expect the payout to be $16,000, less the deductible. Thus, if the cost of buying a new car was more than this, you would have to pay the remainder out of pocket.

Moving on to replacement cost. If your car insurance plan uses the replacement cost valuation method, depreciation will not be considered. Given how quickly and significantly cars depreciate, the replacement cost method almost always results in a much larger insurance payout than the actual cash value method. That said, replacement cost car insurance will result in a much higher premium. Plus, not everyone is able to purchase it. Some insurance companies have requirements that must be met in order to qualify for this type of coverage.

For example, some insurers stipulate that the vehicle being insured must be brand-new at the time of purchase. You will need to provide a bill of sale from the car dealership to prove this. Further, replacement cost car insurance typically has a time limit. For example, your insurance company may only offer this type of coverage for the first 24 to 60 months of your policy.

Determining actual cash value for car insurance

Since most policyholders opt for actual cash value insurance, as it is far cheaper than replacement cost insurance, we are going to give you a rundown of how insurance companies determine actual cash value for car insurance. The reality is that insurance companies use various methods to calculate actual cash value, so we recommend consulting this actual cash value depreciation guide for more information.

That said, most methods start out the same way - with the insurance adjuster estimating the cost of replacing your car and then subtracting the estimated depreciation from that amount. Generally speaking, this process involves assigning a lifespan to your car, estimating the remaining lifespan of your car as a percentage which is considered to be the accumulated depreciation, and then multiplying it by the replacement cost of your car.

Tips to retain your car’s value

If you want to keep your car’s value as high as possible, follow the tips below. These expert-approved tips will ensure you get the most bang for your buck, whether you’re negotiating a payout with an insurance company or selling your car:

Eliminate all odours

Keeping your vehicle free of strong odours, such as cigarette smoke, is crucial if you want it to retain its value as much as possible.

Clean it regularly

Cleaning your car regularly is another tip if you want to improve the value of your car. If you eat or drink in it regularly and there are stains or spills everywhere, this will negatively affect its value when it comes time to sell. Clean your car regularly or hire a professional to do it for.

Keep the kilometres low

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

Repair your car as issues come up

Next, make sure to repair your vehicle as problems arise. You might notice a minor issue and think nothing of it, but it can easily turn into something bigger, which can affect the condition of your car. 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. Thus, maintenance appointments are an excellent way to keep your car in tip-top shape.

Avoid customizations

As stated above, customizations might seem like a good idea but they almost always devalue your car. In fact, research shows that a unique paint colour can cause your car to depreciate 20% faster.

Car value and insurance rates

The value of your car has the ability to impact your car insurance rates. We run through a few of the ways this can happen below.

The value of your car impacts your premium

How much your car is worth is one of the biggest factors that determines your premium. Remember that of all the factors impacting one’s car insurance rates, like age, gender, location, and more, the trim, make and model of your car is one of the most important. Generally speaking, the more expensive or luxurious your car is, the more valuable it will be, and the more it will cost to insure. This is due to the fact that it would cost the insurance company more to repair or replace it if it was stolen or broken down. That is why insuring a new car is usually more expensive than insuring an older car.

Coverage limits

The value of your car will impact the coverage limits that you choose. Each type of coverage in your policy will have a limit that you need to select. For many of them, the limit you select should reflect the value of your car.

The types of coverage you add to your policy

Not every type of coverage makes sense for every car, especially if your car isn’t particularly valuable. For example, adding comprehensive or collision coverage to your policy may not be worth it if your car is paid off and isn’t of high value.

Potential car insurance discounts

The vehicle you drive and the features it's equipped with might allow you to qualify for a car insurance discount. For example, if you drive a newer vehicle with state-of-the-art safety features or an anti-theft device, you are more likely to benefit from discounts which can lead to a cheaper rate.

Contact BrokerLink to learn more about car depreciation

If you still have questions about car depreciation, contact BrokerLink today. A BrokerLink auto insurance specialist can provide further information on how car depreciation works, as well as give you an idea of how much you can expect your vehicle to depreciate in the first one to five years. They can also explain how car valuation impacts auto insurance.

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FAQs on car depreciation

How much does a car depreciate per year?

Vehicles typically lose approximately 15% of their worth in the first year.

How much does the average car depreciate over five years?

This varies depending on several factors, but you can generally expect a new car to depreciate between 40% and 60% in the first five years.

How much value does a car lose when driven off the lot of the dealership?

Some experts say that cars depreciate in value up to 10% as soon as they are driven off the lot, before continuing to depreciate even further in the first year.

If you have any questions, contact one of our local branches.