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What is car depreciation and how does it work?
Unlike fine wine, cars don't get better with age. The moment you drive your shiny new car off the lot, it starts losing value. This phenomenon, known as depreciation, reflects the decrease in a car's market worth over time. In other words, it's the difference between how much you paid for the car and how much money you can get for it when you sell it later on. Several key factors influence how quickly your car depreciates:
- Age:Â as your car ages, newer models with the latest technology and features hit the market, making yours seem less appealing. Generally, cars depreciate the most in their first few years of ownership. New cars can lose a significant chunk of their value in the first year, with value decreasing further in subsequent years.
- Mileage:Â high mileage is a red flag for potential buyers, suggesting increased wear and tear on the engine, transmission and other components. Aim for moderate mileage that reflects responsible use of the vehicle. The average annual mileage for vehicles in Australia is around 12,000 kilometres.
- Make and model: some brands and models depreciate faster than others, so it’s worth doing your research to find out which cars have the best resale value in Australia.
- Condition:Â the overall condition of your car plays a crucial role in resale value. A car that has been meticulously maintained, kept accident-free and boasts a clean interior will fetch a significantly higher price than a neglected one.
How much does a car depreciate per year?
The depreciation rate of a car can vary widely depending on factors such as the make and model, mileage, condition and market demand. Regardless, cars typically depreciate the most in their first year, losing as much as 20% to 30% of their value on average. This means that a car you bought new for $40,000 could be worth just $28,000 12 months later.
Depreciation will typically continue at a high rate in the first three to four years. At the end of this period, your car could be worth less than 50% of what you paid for it. However, as a car ages, its depreciation rate slows, often plateauing at the eight- to 10-year mark.
How to calculate car depreciation
Calculating car depreciation involves determining the decrease in value of a vehicle over time. Here are two simplified methods to estimate your car’s depreciation:
Method 1
This is the easiest method to use for a ballpark estimate of your car’s depreciation.
- Find the difference between the initial value (original purchase price) of the car and its current market value. You can use resources like industry guides, online valuation tools or historical data for similar vehicles to estimate the market value.
- Divide the difference by the initial value.
- Multiply the result by 100 to get the depreciation rate.
Put as a formula, this would be:
(initial value – market value) / initial value x 100 = depreciation rate (%)
For example, if you bought a car for $25,000 and its estimated market value is $18,000, the depreciation rate would be:
($25,000 – $18,000) / $25,000 x 100 = 28%
Method 2
Alternatively, you could estimate depreciation based on the car’s age and expected lifespan, which may give a more accurate picture:
- Find the car’s residual value, which is its estimated value at the end of the usage period you're considering.
- Subtract the residual value from the initial value. This gives you the total depreciation.
- To get the annual depreciation, divide the total depreciation by the number of years in the period.
- To express this as a percentage, divide the annual depreciation by the initial value and multiply by 100.
To put it simply:
initial value – residual value = total depreciation
total depreciation / period = annual depreciation
(annual depreciation / initial value) x 100 = depreciation rate (%)
For example, if you bought a car for $20,000 and estimated its value after five years to be $8,000, this would be:
- Total depreciation: $20,000 – $8,000 = $12,000
- Annual depreciation: $12,000 / 5 = $2,400 per year
- Percentage depreciation: ($2,400 / $20,000) x 100 = 12%
Both methods provide a basic understanding of how much value a car could lose over time, but remember they are just a guide. Various factors can influence depreciation rates, including make and model, mileage, condition, market demand and economic factors.
How can I slow down the depreciation of my car?
While all cars will depreciate over time, there are ways to slow the process to help you get a better deal when you decide to sell. Here are some proactive strategies to maximise your car’s resale value:
Choose your car wisely
The type of car you choose significantly impacts its depreciation rate. Don't get swept away by flashy features: generally, luxury cars and vehicles with high maintenance costs depreciate faster than more affordable, reliable models. Research different makes and models before making a purchase, looking at what is in demand. According to data from VFACTS, the most popular cars in Australia in 2023 were:
- Ford Ranger
- Toyota HiLux
- Isuzu D-Max
- Toyota RAV4
- MG ZS
- Tesla Model Y
- Toyota LandCruiser
- Mitsubishi Outlander
- Mazda CX-5
- Hyundai Tucson
Don’t ignore the maintenance
Routine maintenance is crucial for preserving your car's value. Follow the manufacturer's recommended maintenance schedule for services like oil changes, tyre rotations and brake inspections. Addressing minor issues promptly can prevent them from escalating into more significant problems that could affect resale value. Keep detailed records of all maintenance and repairs, which can reassure buyers and demonstrate that the car has been well cared for.
Keep it clean
Looking after your car's exterior and interior can help maintain its appearance and resale value. Food crumbs, spilled drinks and pet hair are not endearing qualities. Keep a clean and tidy interior by vacuuming regularly and wiping down surfaces, and use seat covers and floor mats to prevent stains and wear on upholstery and carpets. Meanwhile, regularly washing and waxing the exterior can prevent paint damage and rust and keep the vehicle looking fresh. Whenever possible, park your car in a garage or under shade to minimise sun damage and preserve its appearance.
Avoid excess modifications
Extensive customisations like loud exhaust systems, flashy rims or body kits can be a major turn-off for potential buyers who prefer a stock car. Stick to minor upgrades that enhance functionality without drastically altering the car's appearance. Remember, the goal is to make the car more desirable to a wider range of buyers, not just those who share your specific taste in modifications.
Drive defensively
Aggressive driving habits not only put yourself and others at risk but also contribute to increased wear and tear on your car. Practise safe and defensive driving techniques like smooth acceleration, maintaining a safe following distance and avoiding harsh braking. This not only improves fuel efficiency but also minimises the potential for accidents, which significantly impact resale value.
Can I claim car depreciation on my tax return?
In Australia, motor vehicle tax deductions can be claimed from the Australian Taxation Office (ATO) for work-related expenses associated with owning and operating a vehicle – including depreciation.
There are two primary methods for calculating deductions: the cents-per-kilometre method and the logbook method. The cents-per-kilometre method applies a standard rate per kilometre travelled for work purposes, while the logbook method requires detailed recording of all car expenses and the percentage of work-related travel.
The cents-per-kilometre method already accounts for depreciation, so you cannot claim depreciation on top of this. If you use the logbook method, you can claim depreciation on the business portion of the car’s cost, up to a set limit. For the year 2023–24, the car limit set by the ATO is $68,108.
How can I get the best resale price for my car?
When it comes time to sell, there are some additional tactics that can increase the amount you get for your car:
- Sell privately:Â while selling your car to a dealership is convenient, you'll typically get a lower price than selling it privately. Selling privately requires more effort in terms of advertising and negotiating, but the potential payoff can be significant. Online car selling platforms and classifieds can be effective tools for reaching a wider audience of potential buyers.
- Timing is everything: just like the stock market, there’s a season for selling cars. Generally, spring and summer tend to be better times to sell due to increased buyer activity. Avoid selling your car at the end of the financial year when dealerships are trying to meet sales quotas and might be less willing to offer top dollar for your trade-in.
- Know your market:Â research similar cars for sale in your area to understand the current market value. Price your car competitively to attract serious buyers without leaving money on the table. Use online resources and car valuation tools to get a realistic estimate of your car's worth.
- Be honest and upfront:Â disclose any pre-existing conditions or repairs your car has undergone in a transparent manner. While you don't want to scare away buyers, honesty builds trust and avoids potential headaches down the road.
- Hold onto the paper trail: don't underestimate the power of documentation. Keep all service records, receipts for repairs and parts replacements, and ownership documents meticulously organised. This transparency builds trust with potential buyers and demonstrates your commitment to proper car maintenance. These records can also be helpful in justifying your asking price when selling the car.
Which cars have the best resale value?
Cars depreciate at different rates, so it’s worthwhile keeping track of the potential resale value of your vehicle. This can help you choose a car that retains value well and make informed decisions about when to buy or sell.
The Australian Automotive Dealer Association (AADA) and AutoGrab publish a monthly Automotive Insights Report that includes valuable data for car owners, like the retained value of different vehicles. You can use this information to get an idea of how much your car might be worth down the track.
In March 2024, these were the cars with the best resale value in Australia:
2–4 years
| Passenger cars | Average retained value | SUVs | Average retained value |
|---|---|---|---|
|
Toyota 86 |
109.5% |
Suzuki Jimny |
126.3% |
|
Toyota Yaris |
103.4% |
Toyota Landcruiser |
109.9% |
|
Honda Jazz |
99.8% |
Toyota Yaris Cross |
105.7% |
|
Suzuki Swift |
97.1% |
Land Rover Defender |
97.8% |
|
Ford Mustang |
95.4% |
Toyota RAV4 |
96.2% |
5–7 years
| Passenger cars | Average retained value | SUVs | Average retained value |
|---|---|---|---|
|
Mitsubishi Mirage |
123.3% |
Toyota Landcruiser |
89.6% |
|
Fiat 500 |
113.5% |
Suzuki Ignis |
87.4% |
|
Toyota Yaris |
93.5% |
Nissan Patrol |
83.0% |
|
Toyota Prius C |
92.3% |
Jeep Wrangler |
82.3% |
|
Kia Picanto |
87.9% |
Toyota Fortuner |
78.8% |
Depreciation is inevitable, but by following these tips, you can significantly slow down the process and get the most money out of your car when it's time to sell. Remember, a well-maintained, reliable car with a clean history and desirable features will always attract more interest and fetch a higher price.
If you have your eyes on a new car, turn to Savvy for your financing needs. Our expert team can search and compare offers from dozens of lenders to help you find a car loan that suits your needs and budget. Get started with Savvy today!
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