Depreciation - what is it, and how do I avoid it?

Words By

Jim Holder

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Depreciation in the value of a car is as inevitable as death and taxes. The good news is that it's possible to identify the worst offenders and mitigate its effects.

Most cars lose between 50% and 60% of their value in the first three years of ownership. The rate of depreciation is dependent on a variety of factors, which broadly fall into three categories: price, running costs and quality – both perceived and actual.

Price Residual car values are expressed as percentages of the original showroom price. In percentage terms, the depreciation variation between small and large cars may seem quite slight, but in terms of pound notes, the difference is considerable. A 55% depreciation on a £8000 city car equates to £4400, while the same percentage fall on a £40,000 luxury car means a loss of £22,000.

French manufacturers have for a long time been attempting to convince buyers that their premium cars can rival models from BMW and Mercedes; so far without success. For example, Citroen's now-discontinued C6 large executive car is one of the fastest-depreciating cars in history.

That's not to say it's a bad car, but until large French cars can improve in perception of quality, the prognosis for depreciation-avoidance is gloomy.

Running costs With political turmoil in many oil-producing countries and growing demand in emerging markets conspiring to push up the price of fuel, vehicle economy is a key influence on depreciation. Not surprisingly, large cars – especially petrol-engined saloons – tend to suffer the most.

This type of car can seem like an amazing bargain on the used market, but this only holds true if you can afford the running costs. Servicing and parts for a luxury car that was £70,000 new will all be based on that original premium price.

How to buy a car

Quality In the days before the internet became so prevalent, the perception of a car's quality was more of a personal decision. However, the internet makes it much more quantifiable; thanks to the huge amount of data and opinion that's in the public domain. Websites make it easy to find out how many warranty claims or recalls a car has generated, and what owners have said about dealers when it comes to fixing problems. Surveys such as the JD Power satisfaction survey also offer telling insights. All this data – positive or negative ��� will affect how much depreciation will hit cars.

In truth, there are very few bad new cars on sale today. With this in mind, a misplaced but enduring sense of negativity about large brands can work to the advantage of a smart buyer.

Ford, for example, has worked tirelessly to boost its brand image, but there's still a distinction between the performance of its products (which is generally excellent) and the UK public's historically based perception of the manufacturer's quality. The result for buyers – not just of Fords, but of most mainstream brands – is a big stock of great-value used cars, and big discounts on new or nearly new vehicles.

Reducing the effects of depreciation With the causes of depreciation in hand, you should be better-prepared to reduce its effects when buying a car. The obvious answer is to buy in-demand cars with low running costs – such as city cars and superminis.

However, such cars won't be right for everyone, so buyers will need to look at other ways to avoid plunging residual values.

Part of the answer is to reduce depreciation percentages by buying your car for less in the first place – resulting in a smaller percentage of less when you come to sell on. What Car?'s Target Price – a constantly updated database, which tells you the maximum you should pay for a new car – is a great place to start.

Complementing that is What Car?'s Depreciation Calculator. This tool gives you an instant visual representation of the depreciation sustained by up to four cars in their first four years of life.

Just select a make, model and version, and the Depreciation Calculator will produce a graph that plots the price from purchase to four years old. It will also give you an actual value for the car at the end of each year.