What is depreciation and why is it good news when buying a used car?

Depreciation is a term you may hear banded about when shopping for a used car. But, what does it mean?

Depreciation is when the value of a car falls, which happens to all cars over time, though the rate at which it happens can vary. Although losing value sounds negative, it can actually be beneficial for anyone looking to buy a used car.

We’ve explained what depreciation means in full below, as well as how you can use it to get a good deal on a used car.

If you need further information on what to look for when buying a second-hand  car, download our Ins and Outs Guide to Buying a Used Car.

How does depreciation affect a car?

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You may have already heard people say that the moment you drive a new car off the forecourt you lose money: this is called depreciation. Once a car is owned and driven it begins to decrease in value, which means you're unlikely to get the same price you paid for it if you were to sell.

The rate of depreciation can vary from car to car due to a number of different factors that can affect a car’s value, including:

  • How old it is
  • How many past owners it has had
  • How many miles it has been driven
  • The brand and model of car
  • The running costs
  • The overall condition
  • Its service history
  • Whether it’s under warranty
  • The fuel economy
  • How expensive it is to tax and insure

These factors are often connected, with older cars tending to have driven more miles and been subject to more wear-and-tear. There may be some exceptions to this rule: for example, certain brands are seen as particularly sought after despite their use and age, like classic cars. Similarly, an older car could maintain some of its value if it’s only been driven a few miles, is cheap to run and has been kept in good condition.

This means no two cars will depreciate in the exact same way, though there are some general guidelines. Cars tend to take their biggest hit in depreciation in their first year of ownership, losing up to 35% of their value, increasing to 50% after three years. After three years, depreciation tends to slow before it comes to a standstill around the eight-year mark when value stops falling.

Why is depreciation beneficial to used car buyers?

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While depreciation isn’t particularly helpful for car owners, as most drivers can expect to make a loss when selling their car compared to how much they originally paid, it can be beneficial for buyers.

As depreciation is based on the loss of value, it tends to see prices plummet for cars. This means that you have the potential to find a bargain when searching for a used car.

Although depreciation means value is decreased, it doesn’t mean the quality of the car has necessarily fallen. This means you can still get a car in great condition, while benefitting from a lower price than if you were to buy the same car from new. However, it’s important to know what to look out for to make sure you are getting a good deal.

How to use depreciation to get a good deal

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One helpful tip for getting a good deal is to buy a car that’s three years or older. Because the majority of value is lost in these initial three years, you can bypass this stage and take advantage of a lower-priced car. As the rate of depreciation slows after three years, you also won’t lose as much money if you decide to sell the car later.

It’s also worth taking time to do your own checks and research on any used cars you find. When searching, make sure you see the car in person to get a sense of its overall condition. Most dealers will allow you to test drive the vehicle, which can give additional insight into its working order. Checking the mileage of the car and enquiring about its service history can help you to find out how well it’s been kept in the past. By doing this, you should be able to establish the reliability of a car; and if the car is in good condition, you can get a quality car for a fraction of its original price.

Although depreciation can be unfavourable for many car owners, knowing what to look for and buying the car at the right time can allow you to benefit. One of the biggest advantages of buying a used car is that you won’t suffer from the fall in value as much as someone buying a new car, meaning you can limit your loss of money and potentially find yourself a bargain.

For more information on depreciation and what else to look out for when shopping for a used car, read our Ins and Outs Guide to Buying a Used Car.