Why is Depreciation Faster on New Cars?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - January 19, 2021

Borrowers are often told to purchase used vehicles because they depreciate much slower than new ones. Why do new cars lose their value so fast, why does it matter, and can you slow it down? Read on to find out.

Understanding Vehicle Depreciation

Depreciation is the loss of value over time. The longer you’ve had your vehicle, the more miles it’s accumulated, its condition, and its overall desirability in the market, all impact how much value it loses over time. Depreciation never stops, and new cars lose a lot of value in the first few years of ownership.

In fact, it’s usually estimated that as soon as you drive your brand-new vehicle home, it loses around 10% of its value. It’s also possible for a new car to lose around an additional 10% to 20% of its value within the first year of ownership. For a few years after that, you can expect a vehicle to lose about 15% of its value each year. Remember, the second you drive a new vehicle off the lot, it becomes a used car.

The longer a vehicle has been on the road the more risk it has of breaking down or having mechanical issues. There’s likely to be more wear and tear on the interior, as well as the engine and other pivotal parts of the car, which lead to a higher likelihood of failure down the road (literally). Regular wear and tear, increased mileage, and the release of newer models, all contribute to a steady decrease in value – which is why depreciation never stops.

A good rule of thumb is to expect your used vehicles to lose about 10% of their value every year after those initial first years of ownership. Different makes and models tend to hold their value differently, too. This is typically due to desirability and resale value – a Subaru is a good example. They're highly desired by many buyers since they're known to be safe, reliable cars that last a long time.

Depreciation happens to every vehicle, eventually slowing down. After about 10 years, depreciation barely makes a noticeable impact on the car's value. The biggest contributors to the loss of value at this point are mileage and overall condition.

Other factors, such as fuel cost, can influence a vehicle’s resale value as well. Trucks and SUVs may be worth less when gas prices are high. Fuel-efficient cars are more desirable and therefore higher value. Timing and desirability are large factors to consider when you’re picking out your next vehicle, and when you sell your current one.

Why Does Depreciation Matter?

If you intend on keeping your car for years, then depreciation may not be the biggest concern for you. However, if you’re a borrower that likes a new vehicle every few years, depreciation can put you in a rough spot.

When you finance a car, you’re obligated to repay the whole loan amount within the loan term – typically within 48 to 96 months. You can sell/trade-in a vehicle while you still owe on it, but you must get an offer high enough to pay off your current auto loan or be forced to roll over negative equity on your next loan. This is where depreciation can get in your way.

If your car is valued less than what you owe on the auto loan, then you may have difficulty getting a large enough offer to pay off your loan. This is called negative equity, or being upside-down or underwater. If you purchased a vehicle that depreciated quickly and you owe more on the loan than it can be sold for, selling the car can become a hassle.

When your vehicle is valued more or equal to your loan balance, you’re in an equity position – the ideal place to be when you’re financing. This likely means you can sell the car for what you owe on the loan, and possibly walk away from the sale with extra cash in your pocket.

If you’re the type of driver that prefers to keep the same vehicle for years and years, then deprecation and negative equity may not be a concern to you. But if you like to upgrade frequently, then it’s worth your time to look for a car that holds its value. Or, you may be a prime candidate for auto leasing if your credit is in good shape.

Slowing Down Depreciation

You may not be able to stop the hefty drop in value after you purchase a new vehicle, but you can slow it down.

High mileage is often a huge contributor to depreciation. The more you drive and more miles you tack on, the less your car is likely to be worth. If you can’t help how much you drive, then at the very least, make sure you’re keeping up with maintenance. Keep up with oil changes, tires, fluids, brakes, and more, and it helps slow down the loss of value. As a general rule, a well-maintained vehicle is more desired by private-party buyers and dealerships alike.

Additionally, investing in a car with good fuel economy and high resale value, that's known to last, can help you avoid negative equity and keep depreciation at bay.

Should I Buy New or Used?

Newer vehicles can be harder to qualify for when you have poor credit, largely due to the high sticker price. The larger the loan amount, the more risk for the lender – so good credit borrowers have a better chance of being eligible for a new-car loan.

Since newer vehicles depreciate faster, it’s usually recommended that bad credit borrowers invest in used cars. They’re typically more affordable, easier to qualify for, and you have a better chance of staying in an equity position. However, bad credit can make it difficult to find a lender that’s equipped to deal with credit challenges. Here at CarsDirect, we’ve got connections for borrowers with less than perfect credit.

Over the past two decades, we've worked to gather a nationwide network of dealerships that are signed up with subprime lenders. We want to match you to a dealer in your local area that can assist with poor credit auto financing. Get started right now from the comfort of your own home by filling out our completely free and secure auto loan request form. We’ll look for a dealership near you, and there’s never an obligation to buy – so what are you waiting for? Start right now!

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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