Why You Should Check Car Depreciation Before You Buy

The price you negotiate today is only part of what a vehicle will ultimately cost you. Its value when you eventually sell or trade it can make an even larger difference.

That is why checking a car's projected depreciation before buying can be so useful. A vehicle that costs slightly more today may be the less expensive one to own if it retains substantially more of its value. Meanwhile, a seemingly attractive discount on a fast-depreciating vehicle may not be as good a deal as it appears.

You cannot predict an exact future trade-in value. Mileage, condition, accident history, location and market conditions will all affect what a vehicle is worth. However, a good car depreciation calculator can help you compare models, estimate your likely loss in value and avoid ignoring one of the largest costs of vehicle ownership.

What Is Car Depreciation?

Depreciation is the difference between what you pay for a vehicle and what it is worth later.

For example, suppose you purchase a vehicle for $40,000 and sell it five years later for $25,000. That vehicle cost you $15,000 in depreciation, even though you never received a bill labeled “depreciation.”

That $15,000 loss can be more important than relatively small differences in fuel economy, maintenance costs or the discount you originally negotiated.

New vehicles generally lose value most rapidly during their first few years. After that, the rate of depreciation often slows. However, depreciation varies considerably among makes and models. Some popular trucks and SUVs retain a surprisingly high percentage of their original value, while certain luxury vehicles, electric vehicles and unpopular models can lose value much faster.

What Is Residual Value?

Residual value is the estimated amount or percentage of a vehicle's original value that it will retain after a particular period.

If a $40,000 vehicle is expected to retain 60% of its value after five years, its projected residual value would be:

$40,000 × 60% = $24,000

Its projected depreciation would therefore be:

$40,000 − $24,000 = $16,000

Residual values are most commonly associated with leasing. The leasing company establishes a residual value when the lease begins and uses it to calculate the portion of the vehicle's value that the customer will use during the lease.

However, projected residual values are also useful to people who intend to purchase rather than lease. They offer a reasonable way to compare how well different vehicles are expected to retain their value.

Important: A projected residual value is not a guaranteed future trade-in offer. Think of it as an informed estimate and comparison tool—not as an appraisal of the exact vehicle you will eventually own.

Free Car Depreciation Calculators Available Online

The original version of this article featured a Cars.com residual value calculator that is no longer available. Fortunately, buyers can still find useful model-specific depreciation information from several sources.

CarEdge Depreciation Calculator

The CarEdge Depreciation Calculator provides estimated resale values for more than 300 models. It allows you to consider the vehicle's age, current price, expected ownership period and annual mileage.

CarEdge also provides individual model pages showing estimated depreciation and resale value for as long as 12 years. Its depreciation rankings make it easy to compare the estimated five-year value retention of numerous vehicles.

The estimates are especially useful for comparing vehicles before buying. However, they are projections based partly on historical data and cannot account for every trim, option, incentive or future change in the used-car market.

Kelley Blue Book Depreciation Calculator

Kelley Blue Book's Car Depreciation Calculator can also help estimate how a vehicle may lose value over time.

Kelley Blue Book is particularly useful when you are closer to selling or trading because its regular valuation tools can provide current trade-in and private-party estimates based on a specific vehicle's year, equipment, mileage and condition.

Edmunds True Cost to Own

The Edmunds True Cost to Own tool takes a broader approach. In addition to estimated depreciation, it considers expenses such as financing, insurance, fuel, maintenance, repairs and taxes.

This can be helpful when one vehicle has better resale value but another has lower fuel, insurance or maintenance costs. Depreciation is extremely important, but it should be considered as part of the entire ownership picture.

How Knowing Future Resale Value Helps Car Buyers

The most useful way to apply depreciation information is to compare vehicles you might actually purchase.

Suppose two compact SUVs are priced within $1,000 of each other. If one is projected to lose $11,000 over five years and the other is projected to lose $15,000, the second vehicle may effectively cost approximately $4,000 more to own—even though their purchase prices are nearly identical.

This information can help you:

• Compare the real long-term cost of similarly priced vehicles.
• Decide whether a large new-car discount offsets faster expected depreciation.
• Identify models that may be especially attractive when purchased used.
• Choose an appropriate ownership period.
• Reduce the risk of owing more than the vehicle is worth.
• Estimate how much equity you might have when it is time to sell or trade.

A high projected resale value does not automatically make a vehicle the best choice. Reliability, financing, insurance, maintenance, fuel economy and how well the vehicle meets your needs still matter. Nevertheless, depreciation deserves a place near the top of the list.

A Current Car Depreciation Comparison

Consider two popular compact SUVs: the Honda CR-V and Mazda CX-5. The figures below were provided by CarEdge when this article was updated and will change as vehicle prices and used-car market conditions change.

The estimated starting prices are only $775 apart. However, the CX-5 is projected to lose approximately $3,507 more to depreciation over five years.

This does not mean the CR-V is automatically the right choice. You might prefer the CX-5's driving characteristics, styling, interior or available equipment. You might also negotiate a substantially better price on the Mazda.

However, the depreciation comparison tells you something the window stickers do not: the CX-5 may need to be purchased for considerably less—or provide benefits you value enough to justify the difference—to offset its greater projected depreciation.

That is the real value of using a depreciation calculator. It adds another important piece of information to your buying decision.

Possibly Buying Soon? Avoid These Dealer Traps

Before you sign, learn:

- What you don't know about dealer trade-in offers could cost you - Which dealer fees you must pay, can negotiate, or should avoid - How to avoid giving the dealer the upper hand on a used car price - How to avoid overpaying for a new car

Why You Should Use the Price You Expect to Pay

Whenever possible, calculate depreciation from the vehicle's expected purchase price rather than automatically using MSRP.

Suppose a vehicle has an MSRP of $45,000 but you can buy it for $40,000 after a manufacturer incentive and dealer discount. If its estimated value after five years is $25,000, your projected depreciation is closer to $15,000—not the $20,000 loss suggested by comparing its future value with MSRP.

This is particularly important when comparing one model that sells close to sticker price with another that routinely receives large discounts.

A lower projected residual percentage does not necessarily make the discounted vehicle a worse financial choice. Compare the actual dollars you are likely to lose:

Expected purchase price − estimated future resale value = projected depreciation cost

That gives you a more meaningful comparison than looking only at the percentage of MSRP each vehicle is expected to retain.

A Large Discount May Not Mean a Better Deal

Fast-depreciating vehicles are sometimes offered with unusually large rebates or dealer discounts. Those discounts can make them tempting, but buyers should investigate why the manufacturer needs such aggressive incentives.

Imagine that one vehicle can be purchased for $3,000 below MSRP while a competing model sells close to sticker price. The discounted vehicle initially appears to be the better bargain.

But if it is expected to be worth $7,000 less at the end of your ownership period, its larger discount did not overcome the difference in depreciation.

On the other hand, an unusually large discount sometimes does compensate for weaker resale value. The point is not to avoid every fast-depreciating car. It is to include both numbers in your decision:

• How much will you actually pay today?
• Approximately how much value is the vehicle expected to lose?

Buyer Tip: Do not allow a salesperson to use a large discount alone as proof that a vehicle is a great value. Compare that discount with the model's expected depreciation and total ownership costs.

Depreciation Can Help You Decide Whether to Buy New or Used

Depreciation calculators are also useful for identifying the best age at which to purchase a particular model.

If a vehicle loses 30% of its value during its first two years but is expected to lose only another 15% during the following three years, a two-year-old example might provide an attractive balance of price, remaining useful life and modern features.

The original owner absorbed the steepest portion of the depreciation, while you receive a relatively new vehicle at a significantly lower price.

But this strategy does not work equally well for every model. A used vehicle that retains its value exceptionally well may cost nearly as much as a discounted new one. In that situation, buying new could provide a better warranty, lower financing rate and the ability to choose exactly the equipment you want for only a modest additional cost.

Compare the actual new and used prices currently available. Do not assume used is always the better financial decision.

How Depreciation Helps When Selling or Trading a Car

A depreciation estimate can give you a rough idea of how much value your vehicle may retain, but it should not be used by itself to judge a dealer's trade-in offer.

When you are ready to sell or trade, obtain current values and actual purchase offers. At that point, the vehicle's mileage, condition, accident history, equipment and local demand matter far more than a projection made several years earlier.

Use several types of information:

• A current online trade-in estimate.
• At least one instant cash offer, when available.
• One or more offers from local dealers.
• A private-party value if you are willing to sell the vehicle yourself.
• Comparable retail listings in your area.

Remember that these figures represent different things. A dealer trade-in value, an instant cash offer, a private-party price and a dealer's retail asking price will not be the same.

A dealer must allow for reconditioning, transportation, auction fees, carrying costs and the possibility that the vehicle will not sell quickly. Therefore, a dealer's retail asking price does not establish what the dealer should pay for your trade.

Conversely, one low trade offer does not necessarily represent the vehicle's market value. Multiple real offers will tell you much more than a single appraisal.

When you are ready to sell or trade, replace the earlier depreciation estimate with a current appraisal based on your vehicle's year, mileage, equipment and condition.

See what your vehicle may be worth right now →

What a Depreciation Calculator Cannot Predict

No calculator can know exactly what a vehicle will be worth several years from now. Future value can be affected by factors that cannot be predicted with certainty, including:

• Changes in fuel prices.
• New or discontinued government incentives.
• Vehicle shortages or excess inventory.
• Interest rates and the availability of financing.
• Changes in consumer preferences.
• New technology that makes older vehicles less desirable.
• Reliability problems or expensive recalls.
• A manufacturer discontinuing a model or leaving a market segment.
• Unexpected changes in new-car prices.

Your particular vehicle may also be worth more or less than the average estimate because of its mileage, condition, color, trim, options, accident history and geographic location.

For these reasons, depreciation figures should be viewed as planning estimates and comparison points—not promises.

Residual Value Is Especially Important If You Finance

Fast depreciation can create another problem for buyers who make a small down payment and finance for six or seven years.

During the early years of a long loan, the vehicle may lose value faster than the loan balance declines. This can leave the owner “upside down,” meaning more is owed on the loan than the vehicle is worth.

That becomes costly if the vehicle is traded early, stolen or declared a total loss. The remaining negative equity does not disappear. It must generally be paid in cash, covered by applicable insurance or rolled into the next loan.

Before financing a fast-depreciating vehicle:

• Compare its projected value with your estimated loan balance after two, three and four years.
• Avoid unnecessarily long loan terms.
• Consider making a larger down payment.
• Investigate gap coverage when appropriate.
• Plan to keep the vehicle long enough to get beyond the negative-equity period.

How to Compare Depreciation Before Buying

You do not need to predict the future perfectly. You simply need to compare the available information consistently.

For each vehicle under consideration:

• Estimate the actual price you expect to pay, including discounts and incentives.
• Choose a realistic ownership period.
• Enter the approximate number of miles you drive annually.
• Record the vehicle's projected value at the end of that period.
• Subtract the future value from the expected purchase price.
• Compare the estimated dollar loss—not merely the residual percentage.
• Then consider financing, insurance, fuel, maintenance and repair costs.

Use the same ownership period and annual mileage for every vehicle. Otherwise, the results will not provide a fair comparison.

If two sources produce different estimates, do not simply accept the more favorable one. Treat them as a possible range and investigate why they differ.

The Bottom Line

A car depreciation calculator cannot tell you exactly what a dealer will offer for your vehicle three or five years from now. It can, however, reveal something many buyers overlook: two similarly priced vehicles can have dramatically different long-term ownership costs.

The goal is not necessarily to buy the vehicle with the highest residual value. The goal is to understand what each choice may really cost and decide whether the vehicle's other advantages justify that cost.

Before buying, compare the projected depreciation of every serious candidate. Use your expected purchase price, realistic mileage and anticipated ownership period. When it is eventually time to sell or trade, replace those projections with several current valuations and actual offers.

Buyer Takeaway: Negotiating a good price matters, but so does choosing a vehicle that will still be worth a reasonable amount when you are finished with it. The best deal is not simply the lowest price today. It is the vehicle that gives you the value you want over the entire time you own it.