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Why Do Cars Lose Value So Quickly?

Everyone knows that cars lose value quickly. As a general rule of thumb, they lose 10-20% of their value the moment you drive them off the lot, and another 15-20% during each year of ownership. By the fifth year, they are generally worth just 40% of their original retail price.

The Initial Drop:  Retail vs Wholesale Price

The initial drop in value occurs the moment the tires bounce off the dealer lot and onto a public road. Why? Because you pay retail for a new car–the price charged by the dealer–but once the dealer has sold the vehicle, neither they nor anyone else is willing to pay more than wholesale for the vehicle–the amount the dealer pays the automaker for the car. This gap between wholesale and retail price is typically in the thousands.

Standard Annual Depreciation on Vehicles

You can safely estimate that your vehicle will lose about 15% of its value each year. One factor is buyer perception. Buyers do not perceive a used vehicle to worth as much to them as a new one. Lenders feel the same way, so will not lend as much money against a used car, even if it only has 1,000 miles on it and is still covered under warranty. No matter how unlikely it may seem, there is still the RISK that there is something wrong with the vehicle–why else would someone sell a car after such a short period of ownership? Rates of interest when financing used cars are also significantly higher than rates for new cars. Below is a depreciation calculator you can use for your own vehicle or any you are thinking of buying.

Source: How Fast Does A New Car Lose Value

Which Types of Cars Depreciate Fastest? Slowest?

How fast a car will lose value greatly depends on the car itself. What make, the maintenance history of the model, perceived value of the model, color, mileage, has maintenance been done, how much the dealer marked up the car…the list goes on. Fortunately, studies have been done to determine which models are slowest and fastest to depreciate.

Cars with Fastest Depreciation

The faster depreciators are known to be large vehicles/SUVs, midsize cars, and minivans.

  •  Kia Sedona
  • Chevy Impala
  • Jeep Liberty
  • Suzuki Gran Vitara
  • Jaguar XJ
  • Lincoln MKS
  • Volvo S80
  • Nissan Armada
  • Ford Expedition

Cars with Slowest Depreciation

In general, the cars that hold their value best are sports cars, compacts, and–believe it or not–the base models of any lineup.

  • Honda Civic
  • Nissan Altima
  • Acura TSX
  • Toyota Avalon
  • Subaru BRZ
  • Scion xB
  • Toyota Tacoma
  • Chevy Corvette
  • Kia Soul
  • Honda CR-V

Car Brands that Hold Their Value Best

  • Slowest depreciating cars by brand (non-luxury):  Honda, GMC, Toyota
  • Slowest depreciating cars by brand (luxury):  Acura, Audi, Lexus

The Leveling Off

Luckily, the bleeding from depreciation slows each year. It is down to a trickle by the fifth year. After a car is five years old it tends to hold a steady value until it hits ten. After that, the value is wholly dependent on the condition of the car and the buyer looking at it.