How does car depreciation work?

What is car depreciation?

New cars hold an attraction in their shiny wheels, glossy paint and signature smell, yet the moment you get behind the wheel and make that first exciting journey from the dealership to home, you’re losing money. 

Car depreciation refers to the difference in car value between the point of purchase and the point at which you want to sell it. Quite simply, car depreciation is a decrease in value over time. Depending on the make and model, a new car can depreciate anywhere between 10% and 15% once you drive it off the dealership lot. 

It doesn’t matter if you intend to sell it in a year, a decade from now, or whether you’re unloading it privately or trading it into a dealership, depreciation will always play its part in the life of a car, shrinking your profit margin. While it's hard to stop your vehicle from depreciating, there are certain steps you can take to slow it down and maximise its resale value. 

What factors influence car depreciation?

Vehicle depreciation is based on various factors such as age, physical and mechanical condition, kilometres travelled, transmission, and reputation. Knowing how each factor affects the value of your vehicle can help you understand how car depreciation works. 

Age 

Most cars lose value the older they get. Cars with typical depreciation rates may lose up to 58% of their value in three years, 49% in four years and 40% in five years. Manufacturers bringing out newer models and lifecycle updates at ever-increasing rates, as well. This leads to previous versions becoming out of date faster.

Common exceptions to this are specific models of vintage cars, classic cars, sports cars, and luxury vehicles. Some models can appreciate or hold their value pretty well as they get older. 

Physical and mechanical condition 

The better maintained the vehicle, the higher resale value it will attain. Although maintenance won’t stop the value from depreciating, it won’t lose more value than it should. 

Keep your car in top condition by getting it serviced regularly. Maintain the servicing records properly ensuring that everything is logged. Also, keep track of any history of accidents and the number of owners your car has had. 

Kilometres travelled 

Cars have a built-in record of their usage history through the odometer. The impact of high kilometres on a car’s value can depend on the brand as well as the fuel type, however generally the more kilometres a car racks up, the more it depreciates. 

Transmission 

The stop-start nature of driving throughout Australian capitals means many Australians prefer automatic vehicles over manual ones. Manual cars have long been regarded to be lower in value than automatic vehicles as manual transmissions are easier to maintain. 

Fuel economy 

In an age where concerns about climate change, environmental impact and carbon emissions are at an all-time high, fuel efficiency increases a car’s appeal. The classic gas-guzzling V8 engines of yesteryear are largely becoming collector’s items as opposed to everyday vehicles, replaced by smaller four-cylinder or hybrid options with excellent fuel economy. Choosing a fuel-friendly car can give you the edge when you’re ready to sell. 

Manufacturer’s model or reputation 

A brand-new car manufacturer entering the market may find that their vehicles depreciate faster because they are perceived as an ‘unknown.’ They have yet to be tried and tested in Australian conditions. Emerging Chinese brands have suffered from this factor in recent years, having failed to tune their vehicles to the ins and outs of Australian roads. 

On the flip side, a car manufacturer exiting the market may spook owners and potential buyers if they fear not having a warranty or customer support moving forward. Most recently this was seen with Holden leaving the Australian market. 

Spending $2,500 less on a competitor’s lesser-known car may be considered a bargain, only for that model to lose its value twice as quickly. Typically, manufacturers like Toyota, Mazda, Hyundai, and Kia are more likely to prompt lesser depreciation values, given their perceived quality, running costs and access to mechanical parts. 

Calculating vehicle depreciation 

You can estimate the value of your car by calculating vehicle depreciation. Get the difference between the original sale price and the approximate resale price. After, divide the difference in values by the original sale price and then, multiply by 100.  

For example, a $20,000 car - $12,000 resale value = $8,000 loss of value.  

Then, ($8,000/$20,000) x 100 = 40% depreciation. 

Vehicle depreciation for the top 5 vehicles sold in 2022 

To give you a better idea of vehicle depreciation, we’ve compiled the top-selling cars of 2022 and calculated their depreciation rates. Using 2022 sales numbers, we’re assuming a three-year period of ownership.

The estimates for the original price and resale value come from RedBook and other third-party car evaluation sites. We’ve taken the highest estimated original price and the lowest estimated resale value to calculate the depreciation rate.

Claiming vehicle depreciation for tax purposes

You may not be able to claim depreciation on your car as an owner-occupier, however, as a business owner, you can claim a tax deduction for vehicle expenses used in running your business. 

Many car owners forget to include depreciation when they’re adding up their annual car expenses at tax time. If the car is registered to a business, the Australian Tax Office (ATO) permits the business to depreciate their vehicle according to a specified car depreciation rate over 5 years. 

There is a limit on the cost you can use to work out the depreciation of business vehicles. The maximum value you can use for calculating your claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car. The limit for the 2023–24 financial year for business purposes is $68,108. 

Depreciation and car loans

Depending on the type of vehicle you buy and its condition, your car might depreciate at a much faster rate than the principal balance of the car loan. When this happens, you inevitably come to a point where you owe more money to the bank than your car is worth. 

Many factors can cause such a situation to arise including a lack of trade-in, high interest rates and simply paying more for a specific type of vehicle. In most cases, people will make very little or even no down payment at the time of purchase, choosing to finance the entire amount (or close to it) of the vehicle purchase, taxes, licensing and registration. 

It’s important to ensure that when choosing a car and a car loan, you search the market before eventually settling on a reliable make and model that will depreciate on par with the rate at which you make car loan repayments. 

If you are in the market for a new car, check out our range of car loans with some of the lowest rates in the market.

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