When it comes to buying your next car how much consideration will you give to depreciation?
Chances are it’s not much, with the majority of car buyers consistently rating parameters like purchase price, performance, economy, practicality and specification more highly. Yet for the majority of new and used car buyers, depreciation will actually be the single biggest ownership cost.
This is especially true where diesel-engined models are concerned, with the primary focus very much on fuel economy, road tax and company car tax. Let me give you an example. Suppose you’re in the lucky position of being able to buy a new Mercedes-Benz C 220 CDI Executive SE saloon.
A popular enough buy with a state-of-the-art powerplant capable of delivering decent performance (0-62mph in 8.4secs and a top speed of 144mph) and an eye-wateringly good combined fuel consumption of 68.9mpg, CO2 emissions of 109g/km, and yet costing a paltry £60 in road tax over three years.
One of a whole raft of super-efficient diesels in the marketplace, yet it’ll shed a staggering £17,654 in depreciation in just three years and 36,000 miles. That’s around 73 per cent of the total ownership costs for a typical buyer. At today’s pump prices the fuel costs would be just £3,320 – a mere fifth of the cost of deprecation.
What affects depreciation?
Now clearly this is an extreme example – the Mercedes is a brand-new near-£30,000 premium saloon and we’re considering an owner who covers just 12,000 miles a year, but you start to get the picture. Even the lowest depreciating used cars (which generally shed less in value than new ones) struggle to retain more than 45 per cent of their original value after just three years average ownership. And remember of course that when you come to sell, you’ll be lucky to get much more than trade value for your old car, not the full retail price.
So how does depreciation affect different models? Well clearly purchase price is a key factor. In most cases, the more expensive a car, the more you’ll lose in deprecation. But which brand you choose can have a significant impact. Premium brand models tend to lose less in depreciation than similarly-priced non-premium models, although market sector also plays a part. Cars which will still possess plenty of mainstream buyer appeal when they are older will claim higher residuals, so estate cars, MPVs and smaller hatchbacks usually lose less in value than coupés, convertibles or large saloons.
But one of the most important factors affecting a car’s depreciation is its position in the product lifecycle. Cars registered just before an important facelift or at the very end of a model’s lifetime are inevitably hit harder in terms of depreciation as time goes by. But this can be counteracted to some degree if the spec is higher. Better-equipped cars cost their first owners dear as little of the original cost of optional extras is ever recouped, but for second and subsequent owners that better than average specification will actually aid residual value slightly.
Supply and demand also play a pivotal part – if supply exceeds demand, residual values fall, but if demand is higher, they rise. In the current financial climate, of course, that used demand is significantly impacted by the model’s fuel efficiency and CO2-based road tax. Many buyers are now quite happy to compromise a bit on practicality in order to save money here.
And perhaps the last key factor is the vehicle’s mileage. After an initial sharp decrease in value over the first one or two years, most cars’ depreciation curve flattens out, until the mileage approaches the 75,000-mile barrier that is. At which point (despite little justification) the majority of used car buyers lose interest and the car’s value falls more sharply once again.
How to minimise it
So how can you avoid getting hit in the wallet? It’s simple really. Don’t get hung up on any one headline element (like purchase price, specification, insurance premiums or fuel economy) but instead work out all the real financial costs over the likely lifetime of the car – including the depreciation. On any new car negotiating a big discount is essential, and never pay asking price for a used model either.
To maximise retained value always keep your car in a good condition, keep the mileage down where possible, and ensure that you keep on top of servicing and maintenance. Any missing service stamps will cost you when it’s time to sell the car. Stick, if possible, to more desirable brands and more practical cars – like MPVs, estates or hatchbacks.
Don’t buy large saloons or coupés, and avoid any pre-facelifted models unless they’re packed with optional extras. Always sell your car before it reaches 75,000 miles, or decide to run it right into the ground. Buying a two or three-year old Approved Used car and then selling it on once it’s around seven years old is often the most effective way to minimise depreciation. But whether you prefer new or used, always stick to the best-specified examples you can find for the money.
Lastly, avoid any versions which attract higher road tax – the relative cost between road tax groups is only set to increase over the next few years. Follow these rules and you’ll reduce depreciation to an absolute minimum.