What Is Car Depreciation and Why Does It Matter?
Car depreciation refers to the reduction in a vehicle's market value over time. Unlike property, which often appreciates, vehicles are depreciating assets that lose value from the moment you drive them off the dealership lot. For Australian car buyers, this reality has profound implications for how you should approach financing.
The average new car in Australia loses approximately 15 to 25 percent of its value in the first year alone. By the end of the third year, many vehicles have lost 40 to 50 percent of their original purchase price. This depreciation curve flattens somewhat as the car ages, but the early years represent the steepest value decline.
Why does this matter for financing? When you take out a car loan, you are essentially paying for an asset that is simultaneously decreasing in value. If the rate of depreciation outpaces your loan repayments, you can find yourself in a negative equity position, where you owe more on the loan than the car is actually worth.
The Negative Equity Trap: When Depreciation Meets Finance
Negative equity, sometimes called being "upside down" on a loan, is a common trap for Australian car buyers who do not factor depreciation into their financing strategy. This situation is particularly problematic if you need to sell the vehicle before the loan is paid off, as you would need to cover the shortfall out of pocket.
Consider this scenario: You purchase a new car for $45,000 with a small deposit of $2,000 and finance the remaining $43,000 over seven years. After two years, you have paid down approximately $12,000 of the principal, leaving a balance of around $31,000. However, your car has depreciated by 35 percent and is now worth only $29,250. You are $1,750 in negative equity.
This situation becomes genuinely problematic if circumstances change and you need to sell or trade in the vehicle. You would need to find the difference to clear the loan, or roll the negative equity into a new loan, creating an even larger debt burden. Use our free car finance calculator to model different deposit and term scenarios to see how they affect your equity position over time.
Factors That Influence How Fast Your Car Depreciates
Not all vehicles depreciate at the same rate. Understanding the factors that influence depreciation can help you choose a vehicle that holds its value better, reducing the financial impact on your loan.
Brand and Model Reputation: Some manufacturers have stronger reputations for reliability and quality, which translates to better resale values. Toyota and Mazda, for example, consistently rank highly for retained value in the Australian market. Luxury European brands often depreciate faster in percentage terms, though their higher initial prices mean absolute dollar losses can be substantial.
Fuel Efficiency and Running Costs: As fuel prices fluctuate and environmental awareness grows, vehicles with better fuel economy tend to hold their value more effectively. This trend has accelerated with the increasing popularity of hybrid and electric vehicles.
Colour and Features: Neutral colours like white, silver, and grey typically depreciate more slowly than unusual colours. Similarly, vehicles with popular features and safety technology maintain better resale values.
Kilometres Travelled: High-mileage vehicles depreciate faster than those with lower odometer readings. The average Australian drives approximately 13,000 kilometres per year, and vehicles significantly above this average will see accelerated depreciation.
New Model Releases: When a manufacturer releases a significantly updated or redesigned model, the previous generation typically experiences sharper depreciation as buyers prefer the newer version.
Strategies to Minimise Depreciation's Impact on Your Finances
While you cannot stop depreciation entirely, several strategies can help you minimise its financial impact when financing a vehicle.
Make a Larger Deposit: A substantial deposit immediately puts you in a stronger equity position. Aim for at least 20 percent of the vehicle price as a deposit. This buffer helps ensure you stay ahead of depreciation throughout the loan term.
Choose a Shorter Loan Term: Longer loan terms mean slower principal reduction, increasing the risk of negative equity. While shorter terms mean higher monthly repayments, they build equity faster and typically cost less in total interest. A five-year term generally provides a good balance between affordability and equity maintenance.
Consider Buying Used: Used vehicles have already experienced their steepest depreciation. A three-year-old car with reasonable kilometres has lost the majority of its initial depreciation hit, meaning the rate of value loss during your ownership will be more gradual.
Research Resale Values Before Buying: Before committing to a vehicle, research its expected depreciation. Resources like Redbook and industry reports can provide insights into which models hold their value best in the Australian market.
Avoid Unnecessary Add-ons: Dealer add-ons like paint protection, fabric treatment, and extended warranties rarely add equivalent value to your car. These extras increase your loan amount without improving resale value, worsening your equity position.
How to Calculate Your Equity Position
Regularly monitoring your equity position throughout your loan term is a prudent financial practice. To calculate your current equity, subtract your remaining loan balance from your car's current market value. If the result is positive, you have equity. If negative, you are upside down on your loan.
You can estimate your car's current value using online valuation tools, checking similar vehicles for sale, or requesting a dealer appraisal. For your loan balance, check your latest statement or contact your lender for a payout figure.
Understanding your equity position becomes particularly important if you are considering refinancing, trading in for another vehicle, or if your circumstances change and you need to sell. Being aware of where you stand financially prevents unpleasant surprises and allows you to make informed decisions.
Making Depreciation Work in Your Favour
Smart car buyers can actually use depreciation knowledge to their advantage. By purchasing vehicles that have already passed their steepest depreciation phase, you let someone else absorb the initial value loss while still enjoying a relatively modern, reliable vehicle.
A car that is two to three years old with one previous owner and full service history often represents the sweet spot for value. These vehicles typically still have manufacturer warranty remaining, modern safety features, and current styling, but cost significantly less than buying new.
When it comes time to finance this smarter purchase, use our car finance calculator to compare different scenarios. You might find that the money saved on depreciation allows you to afford a shorter loan term or larger deposit, further improving your financial position.
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Car Finance Calculator Team
Our team of finance experts is dedicated to helping Australians make informed decisions about car loans. We provide accurate, up-to-date information to guide you through your vehicle financing journey.