Depreciation is one of the greatest costs in owning a car. Since cars have a limited useful life, a car that is older or that has received more wear and tear has less value than a car that is newer and in better shape. Due to the effect age has on the value of a car, the average car is worth only a small percentage of what it is purchased for at the end of five to seven years.
Depreciation begins the moment a new car owner signs the papers and drives his purchase off the lot. The typical buyer purchases a new car for a price over the dealer’s cost that allows the dealer to make a profit and stay in business. Once a car leaves the lot, it is no longer worth the original purchase price because it could not be sold at a profit for that price. The true value of the car is the price that it can fetch that allows a profit in the open marketplace. Most often, that is the dealer cost or the wholesale trade-in value.
Amount of Depreciation
According to Autos.com, while some models can fetch a premium of up to 15 percent over dealer cost, the average profit margin on most models is between 6 and 9 percent. Some base models and inexpensive vehicles may have a profit margin of as little as 3 percent. This means the average car loses a minimum of between 6 and 9 percent of its value when it leaves the lot, with the actual amount depending on the vehicle. CarsDirect reports that the amount can be as high as 20 percent.
Besides the hit the car takes after the initial purchase, Bankrate reports that cars lose an average of 15 percent to 20 percent of their value per year, based on the present value of the vehicle. For example, a car worth $10,000 that has lost 20 percent of its value the first year is worth $8,000 the following year. The second year, the car loses 15 percent of that $8,000, so it is worth $6,800. This continues the next year, when the car is worth $5,780.
Eventually the rate of depreciation slows down, usually after the third year. It will slow down again after the fifth year, according to CarsDirect. The industry considers cars that are worth 50 percent or more of their original value after five years to be resale value standouts. These are cars of higher quality that wear well and have a longer useful life, or retain their desirability longer. Some models can drop to as low as 20 to 30 percent of their original retail price after five years.