We all know that when you buy a new or used car, the value immediately starts reducing. The more the car is used the more kilometres go on the clock and more wear and tear happens, impacting on the price you can sell it on for. This process is called depreciation.
The rate of depreciation varies heavily from car to car. Luxury brands, gas guzzlers and models with poor reliability depreciate faster. While there's is no exact formula, you can use the following information to get a rough estimation on what a car is worth over time and how to retain as much resale value as possible.
The Year of the Car & Depreciation
When you are creating your budgets for owning a vehicle, a good criterion to loosely follow is that within the first year a new car will lose about 20-25% of its value and then lose approximately 15% each year thereafter. This drop in value is based from the retail price and sometimes there are special prices available or low interest finance offers that reduce the initial loss in value. This calculation is across an average of vehicles but there are some brands and models that do not lose as much value.
A handy way to check how a particular vehicle you are looking at holds its value is to review the listings on TradeMe. For example, a 2 year Swift GL auto that had a new vehicle price of $21,990 is typically being sold for between $16,000 - $17,000. That’s a much lower rate of depreciation than the guide above so it does pay to do your homework.
When you drive a brand new car, you can expect to have a higher initial loss of value than a few years down the track. However, there are many benefits that outweigh this factor.
If you are buying a car new, you're going to drive out of the dealership with total peace of mind that your car is going to have the latest in safety and car technology, it will run well, and if any issues arise they will be taken care of through the manufacturer’s warranty.
You will also know exactly who and how your car has been driven and you’ll get to experience that feeling of being the first owner.
1-2 Years Old
Buying a car that is one or two years old can be an effective way to get the luxury of a new car, and reduce that initial depreciation. You continue to receive the benefits of having the remainder of the manufacturer’s warranty (when the servicing conditions have been met) to cover any major repairs and the vehicle is usually in near new condition.
Often there are deals available for near-new vehicles as dealerships sell off their demonstrator models or ex rentals. However, that sometimes means you can’t access the new car offers such as low interest rate finance.
2-5 Years Old
This is the sweet spot of owning a car with regards to depreciation. You still get all of the comfort, safety and reliability benefits of the latest model and if you keep up the servicing requirements there should be no major repairs. A well-kept service history is an excellent advantage when you do choose to sell your car.
Older than 5 Years Old
Despite a car losing value most rapidly in the first few years of its life, the older it gets the slower it will depreciate. A well-kept, 5+ year old car can be up to 30-50% cheaper than what it was originally worth or its newer model. However it's important to remember to factor in the costs of maintenance if you're opting for an older model.
Try to buy or sell before a car hits each 100,000km benchmark as cars depreciate rapidly for every 100,000km on the clock. This is attributed to general wear and tear and parts like cam-belts are, on average, expected to be replaced every 60,000km - 100,000km. All current Suzuki models feature chain drive so you don’t have to worry about replacing cam-belts.
How to Minimise Depreciation
There are a few steps you can take to minimise depreciation when buying a new car and selling your old one.
Rust, stains, scratches and leaks will all lead to a car depreciating faster. Keep your car in good condition by getting regular services and maintaining the service records. A full service history gives potential buyers peace of mind, so keep all your car documents in a safe place to show if needed.
Keep it clean and tidy, storing your car under cover when possible, and taking care to drive safely and efficiently on the road. If the car has been in a crash or thrashed, the car will lose value faster (sometimes by several thousand dollars – even if the problem was properly fixed) due to the resale becoming harder. Buyers are deterred by the higher potential of lessened reliability and safety issues. A car that you spend a lot on fixing defeats the saving of buying an older or repaired vehicle and you will most likely find you are worse off financially.
Everyone looks at the kilometres on the clock, so where and when possible, drive less as cars with fewer kilometres hold their value better. Also don’t be too quick to swap a new car for something else. The highest level of depreciation of a brand new car is within the first 12 months, so hold onto it beyond this time.
Make and Model
Ensure you research the specific make, model and year of the car you want before purchasing to see how much values have gone down.
Cars typically have a 5-7 year model cycle, with a mid-cycle facelift halfway through. Buying a previous model (or previous facelifted model) will save you more initially, however this may be offset by a lower future resale value.
Sell your car well before its replacement model arrives in the showrooms. As newer models of cars come out, older cars can be viewed as less desirable and their technology more outdated. To keep up to date with the latest news, read motoring magazines and websites
In New Zealand, buying a Japanese make is very often preferred as the cars depreciate at a slower rate. Because of their popularity, parts are often easier to find and cheaper to replace.
Smaller, more economical models typically depreciate at a slower rate than heavier, less economical cars. As do more affordable cars compared to expensive luxury cars. Popularity also has a part to play – the depreciation is likely to be less with more demand.
Colour and Features
It pays to stick to popular colours – an outrageous shade might appeal to you, but will put off many buyers when you want to sell your car. The market for modifications such as spoilers, wide wheels and flared wheel arches can be very small, so choose the right features when you buy. For example, reverse cameras and air conditioning are must haves on mainstream cars.
Leasing versus Owning
With leasing a car, there’s no need to worry about claiming the car’s depreciation separately. Suitable more often for businesses, depreciation costs are included in the operating or financing lease monthly payment. This monthly payment is 100% tax deductible and you are protected from inflation and the resale risk.
We recommend you obtain professional tax and accounting advice if you are considering this option for your business. Our Suzuki Dealership Business Managers are also happy to provide advice on the range of options available.
Car depreciation is a tricky calculation as there are so many factors to consider. Take your time researching cars online and in-store. Your local dealerships will be more than happy to guide you in the right direction, but always make sure you do your own research so you can ask more effective questions and know you are getting the deal right for you.
Considering buying a car new?
No problem! We've put together a Guide to Buying a New Car that you can download for FREE below.