Although we don't usually think of depreciation as an expense, it's actually the single greatest cost involved with owning a new car. The old adage is true—your car will start to depreciate the instant you drive it off the lot.
How much are we talking? On average, a new vehicle depreciates 19 percent in the first year, half of which occurs immediately after you take possession. Fortunately, depreciation does not continue at this rate. You can expect a 15 percent drop in the second and third years. As your vehicle approaches five years old, depreciation slows considerably until it becomes negligible, usually at the 10-year mark. After that, the condition and desirability of the model will be the main determinants of its worth. Your car will probably continue to lose value, not because of depreciation as such, but due to continued use that increases mileage and affects its overall condition.
Keep in mind that some vehicles depreciate faster than others. Models that were popular when new are likely to remains so on the used car market. Since they are easier to sell, they will depreciate relatively slowly. Models that depreciate more rapidly aren't necessarily less safe or reliable. They just don't rouse a lot of interest and take longer to sell.
We should also mention that cost of fuel can have a major impact on depreciation. A sustained spike in gas prices will drive down the value of large SUVs and some V8-powered passenger cars. At the same time, depreciation of the most efficient used vehicles may slow down or even reverse. That's right, an older car with stellar efficiency can temporarily increase in value when gas becomes expensive.
For buyers who intend to keep a new car for a long time, depreciation is less of an issue. Whether your car loses value quickly or slowly doesn't really matter if you hang onto it long enough. Depreciation will eventually take its full toll. On the other hand, if you're going to trade or sell within the first five years, the rate of depreciation can have a major impact on your wallet. It's certainly something to consider when buying a new vehicle.