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What is car depreciation and how does it affect insurance?

4 minutes

Car depreciation can be a huge deciding factor when it comes to selling your car and choosing a new one. 

Car depreciation

Car depreciation is the difference between the value of your car when you first bought it and how much it’s worth when you sell it. With brand new cars, it’s well known that it drops in value the second you drive off the forecourt.

The supply and demand of a particular make or model can impact how much it depreciates. The majority of cars take their biggest hit during their first year. This quick rate of depreciation tends to slow down after 3 years, but it makes sense to consider it as a factor when you start shopping for a new car.

In an ideal world, the car you buy would keep its value for as long as possible but most vehicles are sold for a fraction of their original price.

How does depreciation affect my insurance policy? 

When you take out car insurance, your car is protected against its current market value, not the amount you paid for it. This means your payout if you were involved in an accident could be much less than you originally paid for the car.

Because car depreciation is not on a scale and varies significantly from model to model, there is no set way that depreciation will affect your insurance. Whether you buy new, used or lease a vehicle, they all depreciate at different rates. 

Car depreciation rate 

Despite depreciation being one of the most unavoidable aspects of buying a car, there are a few things you can look out for to reduce it:

  • The MPG - the fuel efficiency of a car can affect depreciation. Cars with larger engines tend to depreciate faster, while more economical cars (with lower running costs) generally depreciate more slowly.  
  • Buy a nearly new or used car - buying a car that’s used or nearly-new means it will depreciate in value much slower than a brand new car, as it will have already had its rough first few years. 
  • Previous owners - the number of previous owners your car has had can impact its value when you come to sell it. Generally, the more owners, the more it depreciates. It’s always a good idea to check the car’s logbook or VC5 registration to find out.
  • Brand reputation - cars from a brand with a good reputation for reliability tend to retain their value better than less well known makes and models.
  • The manufacturer - research whether cars from the manufacturer you’re looking at tend to hold their value across different models to get the best long-term value. 

 

How to stop car depreciation

Keeping your car in its best condition will help you retain its value when you come to sell. Consider these factors to keep your car in top shape for as long as possible: 

  • Condition - keeping your car in good condition is one of the best ways to stop dramatic depreciation over a short space of time. This includes not modifying it, repairing scuffs and scrapes, and keeping a servicing record.
  • Mileage - the more miles on your car, the less it’s worth. So keeping the mileage as low as possible can really help.
  • Time of year - selling your car at the right time of year can help to increase its value. Typically convertibles sell for more in the summer months when they’re more in demand, with 4x4s selling for more in the winter.

Car depreciation tables

While some cars are known to lose their value quickly, there are a few models out there that hold their value longer than others. Generally, it’s thought that SUVs keep their value better than other models from the same manufacturer.

Below are some of the models that tend to have the lowest rates of depreciation*:

Model Original Price 3 year residual value Value retained 
Toyota Prius 1.8 VVTi Active               £24,255 £24,255 £15,250  
Peugeot 3008 £24,483 £13,483  55.2%
Audi Q8 £64,810 £41,750  64.4%
Audi E-tron £71,520 £46,575  65.1%
  

Many rare sports cars and high-end electric vehicles hold their value, as they become collectors’ items. Tesla cars have a reputation for holding on to their value and dominate the electric vehicle market as one of the highest-value brands.

*Information correct as of September, 2019. 

Electric car depreciation

Electric vehicles  tend to hold their value and depreciate at a slower rate than both petrol or diesel cars, with many hybrid models also holding onto their value.

A study by What Car? found that electric vehicles on average retain 47% of their value. But, as technology rapidly improves, it’s guaranteed new models with even more impressive technology will begin to flood the market, affecting the depreciation of previous models.

However, there’s also a strong argument that the increase in makes and models will lead to an increase in demand, meaning the next generation of electric cars will hold on to their value for longer.

As the UK government continues to introduce measures to limit diesel vehicles and encourage electric vehicles, the demand should only increase further - making an electric car a smart financial investment. For more information about the benefits of an electric car, real all about the pros and cons in our article, should I buy an electric car? 

And don't forget to take a look at our car insurance and electric car insurance to make sure you're covered. 

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