What is car depreciation?

You may have come across the term ‘depreciation’ when buying a car. But what does it mean? Here’s everything you need to know.

Cazoo Editorial Team Byline Icon

By Cazoo editorial team

Updated: 25 March 2024

Depreciation is a word you’ve probably heard in relation to both new and used cars. It refers to a car’s loss of value over time, and it can play a major role whether you’re buying or selling a car.

Here’s our guide to what car depreciation means, how depreciation is calculated and more.

What does depreciation mean?

Depreciation is the loss of value over time. It happens to the majority of things you buy – clothes, electronics, furniture and most other consumer goods. Depreciation is a constant process, but you’re usually only aware of it when you plan to sell something you own. 

Even after a fairly short amount of time, the item’s value will usually have dropped from the price you originally paid for it when it was new – and that drop is the item’s depreciation. In most cases, depreciation continues over time until the item is of little, or even no, value. How quickly that process happens is known as the depreciation rate.

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What causes depreciation?

Most consumer items depreciate simply because they deteriorate over time. With a car, components will gradually wear out and the interior and exterior may get scuffed or marked. Demand and supply play a part, too – if a lot of people want to buy the type of car you own but there are only so many available, its value will depreciate more slowly.

What factors affect car depreciation?

Simply using a car causes depreciation. The more miles you do, the less your car will be worth as its components gradually wear out.

A car’s popularity, reliability, efficiency and maintenance costs also factor into how much a car depreciates. Different cars depreciate at different rates depending on how much they’re affected by these factors. Some things are out of your control, but there are others that you, the car’s owner, can influence.

How is depreciation calculated?

To calculate a car’s depreciation you simply deduct what it’s worth now from what it cost when you bought it. 

Here’s an example:

A car that cost £20,000 when new and is now worth £10,000 has depreciated by 50%.

How much do cars depreciate per year?

How much a car depreciates each year depends on the specific make and model and what it cost in the first place, so rather than looking at a specific amount of depreciation, look at its depreciation rate –  the speed at which its value drops over time. 

A car generally depreciates the most (and has a higher depreciation rate) in its first year, partly because of the initial tax you pay on new cars and partly because it’s now a used car and not a new car. Traditionally, your car could lose anything from 10% to 35% of its value in that first year.

As a car gets older, its depreciation rate generally slows and once it has reached a certain age it usually has little value left to lose in depreciation, as long as it’s roadworthy. After 10 years, for example, a car’s depreciation rate may have slowed to as little as 1% or 2% per year.

What does ‘residual value’ mean?

You’ll sometimes see depreciation expressed in terms of ‘retained value’ or ‘residual value’. Using our previous example, a car that cost you £20,000 when new but is now worth £10,000 has a retained (or residual) value of 50%.

Why does depreciation matter?

Studying depreciation rates is helpful when buying a used car because you may be able to spot a real bargain. It’s amazing how much value some cars depreciate in the first few years of their lives, which can make them fantastic value as a used buy. Sometimes, a car that seems overpriced when new can suddenly become a great deal after a year or two, when you can pay far less for it.

On the other hand, you wouldn’t want to be the first owner of a car that’s going to lose tens of thousands of pounds of value by the time you come to sell it. Studying car depreciation rates can help you avoid falling into that trap.

Depreciation rates also determine the cost of getting a car on a lease or a personal contract purchase (PCP) deal. Car leasing rates and the cost of a PCP are based in large part on the predicted value of the car when the lease term ends. Your lender tells you the guaranteed future value for your car – how much the lender expects it to be worth after a certain period of time. Your monthly payments include the cost of depreciation during the time you have it.

Find out more about PCP car finance here.

Do all types of cars depreciate?

There’s no hard and fast rule about what type of car loses the least value as it depreciates. As a general rule, cars that are popular tend to lose relatively little of their value – it’s a simple case of demand vs supply. SUVs such as the BMW X5 remain hugely popular and many of them have low depreciation rates.

Some cars actually appreciate in value over time, meaning that they’re worth more when you sell them than when you bought them. This is the case with many classic cars and some rare sports cars. It was also the case with some nearly-new electric cars in recent years.

In general, a combination of factors (including the coronavirus pandemic, component-supply issues and inflation) caused the price of many used cars to increase rather than decrease during 2021 and 2022. Over the course of 2023, however, most cars returned to normal levels of depreciation and some electric cars depreciated more heavily than expected.

BMW X5

What type of cars depreciate the most?

Again, there’s no hard and fast rule about which cars depreciate the most. A car’s popularity is a good predictor, however. Large saloons and MPVs, for instance, have fallen out of fashion in recent years and can have high depreciation rates.

That said, some popular car models have high depreciation rates because there are a lot of used examples on the market. Many luxury cars have high depreciation rates because they can be expensive to maintain as they age.

How do I minimise depreciation?

In order to minimise depreciation, a good place to start is by buying a car that's expected to have a lower rate of depreciation. Other things you can do include keeping the mileage to a necessary minimum and keeping the car in good condition. Cars that have been looked after properly – and have a full service history – will hold their value longer and be more attractive to potential buyers.

An easier way to find or sell a car

You’ll find lots of used cars for sale at Cazoo, all available to buy through our trusted dealers.

Cazoo makes selling a car just as easy – just enter a few details for an instant online valuation. If you accept the offer our partners will get in touch to arrange payment and collection of your car at a time that suits you.

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