One of the key considerations when buying a new car or van is how well it will retain its value, also known as its depreciation rate.
Not having to worry about how much value a new vehicle will lose is also one of the key benefits of choosing to lease a brand new vehicle, rather than buy one.
Here, we take a look at how age and mileage, plus many other factors, affects vehicle value.
In terms of car valuations, depreciation is the difference between the amount you spend when you buy a vehicle and the amount you receive when you sell it (otherwise known as its ‘residual value'). A new vehicle typically loses value as soon as you drive it away from the sales forecourt. A more expensive car will put more strain on your bank balance in the first instance, but you may find that it keeps its value better than a cheaper alternative.
The residual value of a car or van is how much the vehicle is expected to be worth by the time it comes to be replaced. According to the AA, an average new car running at 10,000 miles a year will have a residual value of around 40% of its new price after three years.
Investing in new cars, which often come with warranties or optional service packages, can alleviate the impending pressure of the increased maintenance costs associated with second-hand cars.
However, if you take pride in owning a brand new vehicle and upgrade every two years or so, the typically high rate of depreciation could well be burning a hole in your pocket. There is also, of course, the high initial OTR (‘on the road') cost to consider in the first place.
Leasing a car would allow management of depreciation costs and also minimise the risk of big repair bills
As part of a leasing contract, you pay a fixed monthly cost, which can include (or be upgraded to include) servicing and repairs. If you cover a lot of miles and replace your car relatively frequently, leasing can often work out as a cheaper option than buying a brand new car outright.
Find out more about the different types of personal leasing contracts in our useful guides.
If you are part of a business that runs a fleet of cars, leasing can also offer you the opportunity to protect capital against the cost of depreciation. As well as this, leasing offers a vastly reduced initial rental when compared with OTR prices, and tax benefits too. For example, VAT-registered businesses can claim back 50% of the VAT on the finance element of a contract hire agreement.
Find out more about the different types of business leasing contracts in our useful guides.
What makes depreciation such a complicated matter is that not all vehicles lose their value at the same rate. A huge range of factors influence the speed at which a vehicle depreciates, including:
The newer a car is, the faster it depreciates. Once cars reach around five years old, the depreciation rate slows right down, and after around eight years the vehicle will have depreciated almost as much as it's ever likely to. Of course, there are other factors to take into consideration with older vehicles – although they may no longer be depreciating as quickly, their value will be damaged considerably by the likelihood of high repair bills. Also, in some rare cases, popular or classic cars may even bounce back in price further down the line.
One of the most prominent considerations when buying a new car – whether new or second-hand – is how fuel efficient it is. More people are interested in using a car that is cheaper to run, so there is increased demand for vehicles that boast high rates of fuel economy. This high demand drives up prices and slows down depreciation rates.
Choose a great leasing deal on a fuel efficient vehicle from Nationwide Vehicle Contracts. We offer contracts on electric vehicles, hybrids and vehicles with less than 95g/km CO2 emissions.
Every so often, car manufacturers release new models of their vehicles (some more often than others). A brand new model is likely to depreciate slower than a model that is soon to be replaced by an updated version.
The more in demand a vehicle is, the slower it will depreciate. Demand is influenced by an almost endless list of factors, including exclusivity, limited edition runs, fuel economy, reputation and the popularity of certain brands.
The more miles a car has done, the more its value depreciates. A car that is three years old and has only done 15,000 miles will be worth more than one the same age that has done 60,000. The more miles a car has done, the more work all of the vehicle's various components have had to do, and so the closer they are to needing repair or replacement.
If your car is in a sound, clean condition, it stands to reason that it will reach a higher sale price than one of the same age that is covered in dents, scratches and rust.
Any depreciation values given are only ever going to be estimations of what your vehicle is likely to be worth in the future. If you want to help make your car keep as much of its value for as long as possible, there are a few simple things you can do:
stick with constantly popular colours like silver, black and blues, rather than whatever shades that are fashionable at the time
It is important to choose a model that is going to give you good fuel efficiency, especially with new government regulations impacting costs on new vehicles
As we've discussed before, the higher the demand, the higher the price the vehicle will achieve.
The more money you save at the outset, the less you stand to lose when it comes to selling the vehicle on.
Once you've got your hands on your new car, looking after it appropriately can also help slow depreciation down.
Taking out a business or personal contract hire agreement means you don't have to worry about how much the car or van will depreciate.