The Truth About Depreciation

It is widely regarded that depreciation is the biggest single motoring expense. Whilst this is generally true, it does not mean that a car that depreciated more slowly will necessarily save you money. There are many factors that can offset any savings. In the end there is only one way to beat the cost of depreciation.

Depreciation is the amount of money that a car loses over time. When expressed as a quantity it represents the difference between what a car is worth now compared to what it cost when purchased, often it is expressed as a percentage of the original price e.g. a car costing £20,000, that is now worth £15,000 has depreciated by £5,000 or 25%.

To enable comparison across different makes and models a common timeframe and mileage must be used, this is typically 3 years and 36,000 miles. The slowest depreciating cars will depreciate by approximately 45 - 50% over this period, the fastest one by as much as 70%. This difference on a £20,000 car is as much as £5,000, which is a lot of money.

However, there are flaws in the way a common depreciation figure is calculated, the main one being the purchase price. All new cars have list price, the amount that the manufacturer would like to sell the car for. This is rarely the actual price that is paid for the car. Most cars are sold at a discount to the list price, the amount of discount varies depending on desirability of the make and the length of time a particular model has been on the market.

By comparing two cars with a similar list price, but different discounts, it is possible to illustrate that a slower depreciating car can still cost more money. The following table shows an Audi A3 with a retained value of 49% compared to a VW Golf with a retained value of 46%. Whilst the Golf has a higher list price and lower value after 3 years, the difference is offset by the additional discount of £685. All figures are sourced from www.whatcar.com and are correct as of 1st January 2014.

OK, the above example end up being only £6 different, but it illustrates a key message that irrespective of the depreciation, it is important to negotiate the best possible discount when buying.

Let’s take another example of two nearly identical cars from the Volkswagen Audi Group (VAG); the Skoda Citigo and the VW Up! In a recent article on the AutoExpress website, they concluded that the Up! has lower costs than the Citigo (http://www.autoexpress.co.uk/volkswagen/up/62855/volkswagen-10-75-5dr-groove-526). Based on the entry level specification for each car the following table shows that buying the more expensive VW does cost less in depreciation, though only by £41, which is not enough to offset the extra initial outlay of £339. So even though the VW depreciates less, it still costs £298 more than the Skoda.

Other factors to take into consideration are that the retained value is based on the car being in good condition and with a full service history at the end of the period. A poorly maintained car will be worth significantly less. The retained value is not guaranteed when you come to sell the car; it is only a guide. Even if you purchase the car on a lease deal with a built in retained value, there are conditions written into the contract that enable the retained value to be amended based on how well the car has been looked after. Lots of things could happen to change the actual value of your car e.g. covering more miles, involvement in an accident, minor bumps, scratches and paint chips, changes in fashionable colours; these can all reduce the value of your car.

The only way to beat the cost of depreciation is to buy a cheaper, used car. Whilst a new car will typically lose 50-60% of its value over 3 years, the depreciation is not spread evenly over those 3 years. Most cars will lose value as soon as they are registered to the first owner; this is at least 15% of the list price, but can be as much as 30%. That is a loss in 1 day, the day that you take delivery. Admittedly you will experience the same degree of loss if you buy a used car from a main dealer, but in the used car market this can be reduced by buying from a used car supermarket or an independent trader, or even privately or at auction (provided that you understand the risks involved).

There is a belief that cars depreciate slower as they get older; this is not necessarily true. Any typical car will depreciate at a rate of roughly 50% over 3 years / 36,000 miles, be that from 1 year old to 4 years old or 3 years old to 6 years old. The reason that depreciation is less on older cars is that the starting value is lower. The following table shows the value of a car dropping 50% every 3 years

This shows that the depreciation on a new £20,000 car over the first 3 years (£10,000) is the same as the depreciation on a used car purchased at 3 years that cost £40,000 when new.

The only way to reduce the cost of depreciation, without resorting to specialist or classic cars, is to spend less money when you purchase the car in the first place. Spend £10,000 on a car instead of £20,000 and the depreciation cost will be halved.

You can also benefit from depreciation by purchasing badly depreciating cars as used bargains. The following article on the LoveMoney website shows the best and worst depreciating cars in the UK across 14 categories

http://www.lovemoney.com/news/cars-computers-and-sport/cars/15479/car-depreciation-ten-hold-value