How does car depreciation affect total ownership cost?

How Car Depreciation💡 Definition:The decrease in value of an asset over time due to wear, age, or market conditions. Affects 💡 Definition:The complete cost of owning something over its lifetime, including purchase price, maintenance, insurance, fuel, repairs, and eventual resale value.Total Ownership Cost💡 Definition:The complete cost of owning something over its entire lifetime, including all purchase, maintenance, and operational expenses.

When you're considering buying a car, it's easy to focus on the purchase price and monthly payments. However, one of the most significant factors affecting the total cost of owning a vehicle is depreciation. Understanding how depreciation works can help you make smarter financial decisions and save money in the long run.

What is Car Depreciation?

Car depreciation is the decrease in a vehicle's value over time. It's the difference between what you originally paid for the car and what you can sell it for later. Unlike fuel or maintenance costs, depreciation isn't a direct cash outflow, but it profoundly impacts your financial bottom line when it comes time to sell or trade in your vehicle.

Depreciation as a Major Cost Driver

Depreciation accounts for about 36% of total ownership costs. According to the 2025 AAA study, the average annual depreciation for a vehicle is approximately $4,334, with some more recent data indicating an average of $4,680 annually. This makes it the single largest cost of owning a vehicle, often surpassing fuel, insurance, and maintenance expenses.

How Depreciation Unfolds Over Time

The depreciation curve is steepest during the early years of ownership. For most vehicles, you can expect:

• Year 1: A loss of 15% to 20% of the vehicle's value.
• Years 2-5: An additional 15% depreciation annually.

By the end of five years, a new car typically loses about 55% of its original value. For instance, if you purchase a car at the 2025 average MSRP of $38,883, it might depreciate by $5,832 to $7,766 in the first year alone.

Depreciation by Vehicle Type

Depreciation varies widely by vehicle type. Here's a snapshot of annual depreciation costs by vehicle category:

Electric vehicles, in particular, experience higher depreciation due to market uncertainties and rapid advancements in battery technology. Pickup trucks face consistently high depreciation across all powertrains.

Real-World Examples and Scenarios

Consider two buyers: Jane buys a brand-new compact SUV at $30,000, and Mark buys a 3-year-old version of the same model for $20,000. Over the next five years, Jane's car depreciates to $13,500, while Mark's decreases to $9,000. Jane experiences a $16,500 loss in value, while Mark only sees an $11,000 depreciation. By choosing a used vehicle, Mark saves $5,500 in depreciation costs alone.

Common Mistakes and Considerations

1. Ignoring Depreciation: Many buyers overlook depreciation when 💡 Definition:A spending plan that tracks income and expenses to ensure you're living within your means and working toward financial goals.budgeting💡 Definition:Process of creating a plan to spend your money on priorities, including fixed expenses like pet care. for a car. Remember, it's a hidden cost that can significantly affect your finances.

2. Focusing Only on Initial Costs: While upfront costs are important, consider long-term depreciation to understand the true cost of ownership.

3. Overlooking Vehicle Type: Different vehicles depreciate at different rates. Research residual💡 Definition:Estimated value of asset at end of lease or useful life values and choose models known for better value retention.

Bottom Line

Depreciation is a major factor in the total cost of owning a car, often representing the largest single expense. By understanding how depreciation works and considering it in your purchasing decision, you can make more informed choices and potentially save thousands of dollars over the life of your vehicle. Choose wisely, and remember that sometimes a slightly older car can provide significant savings💡 Definition:Frugality is the practice of mindful spending to save money and achieve financial goals. while still offering reliability and performance.