How much does a car lose value?
23 November 2023
By Joy Pearson
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When you're financing a used car in the UK, understanding depreciation is crucial. It's the silent factor that can influence your financial commitment and the overall value of your investment over time. But what exactly is depreciation, and how much value does a car really lose after it's driven off the dealership lot?
The concept of depreciation is simple: it's the difference between what you pay for a car and what you sell it for later. However, for used cars, the depreciation curve is less steep compared to new cars. A new car can lose up to 30% of it's value in the first year and then continued to depreciate by about 15-20% each year after that. Used cars, having already undergone this initial drop, depreciate at a slower pace.
For those looking to finance a used car, understanding depreciation is vital because it affects the future vehicle valuation and, consequently, the terms of the finance agreement. Let's say you finance a used car that's three years old; while you won't face the steep first-year depreciation, the car will still lose value over the period of your finance agreement. The key here is predicting this depreciation as accurately as possible to ensure the finance terms remain favorable.
The rate at which a used car loses its value can depend on a range of factors. Make and model play a significant role - some brands are known for producing cars that hold their value due to their reliability or prestige. Mileage is another crucial factor; a car with higher mileage will have a lower resale value due to the wear and tear associated with extensive use. The car's condition is also paramount; a well-maintained car with a full-service history will always be more appealing and retain more value than one with a spotty maintenance record.
For consumers using car finance, depreciation affects not just the value of the car at the end of the agreement but also the monthly payments. In a PCP, for example, the final balloon payment is based on the Guaranteed Future Value (GFV) of the car, which is directly influenced by its expected depreciation. If the car depreciates more than anticipated, it could mean that the GFV is set too high, leaving customers with a car worth less than the balloon payment.
Therefore, it's crucial for buyers to consider how the depreciation of their chosen used car will align with their finance plan. Choosing a car known for holding its value and ensuring it is well taken care of during the ownership period can make a significant difference in the financial outcome when the time comes to sell or trade-in the vehicle.
From the perspective of car finance companies, educating customers about depreciation can help in crafting finance deals that are realistic and fair, ensuring that customers feel satisfied with their purchase and the associated finance agreement. It also helps in maintaining a good company reputation, as customers are less likely to face negative equity situations where they owe more on the finance than the car is actually worth.
Overall, while depreciation is an inevitable aspect of car ownership, understanding its nuances - especially in the context of used cars - can empower consumers to make informed decisions that align with their financial goals and circumstances.