The cost you never get an invoice for
Depreciation is the difference between what you paid for a car and what you can sell it for. It is normally the largest single cost of ownership, larger than fuel, insurance and servicing combined, and it is the only major cost that never appears on a bill. You discover it once, at the end, when you sell.
Because it is invisible, it gets less attention than it deserves. A buyer will spend an afternoon comparing fuel consumption figures that differ by half a litre per hundred kilometres, and then choose between two cars whose residual values differ by fifteen percentage points without noticing. In this article we look at depreciation alone, in detail, as a quantity that can be measured and forecast.
The mechanics: a curve, not a line
Depreciation is not a constant annual amount. It is front loaded. The steepest fall happens the moment the vehicle is registered and continues through the first year, then flattens progressively. Two facts explain most of the shape.
First, registration converts a new car into a used car, and the used market prices in the buyer’s loss of choice, of full warranty and of factory freshness. Second, the taxes and margins built into the new price, described in our discussion of cross border price gaps, are largely unrecoverable on resale. If a third of the new price was tax, the used market does not reimburse it.
The useful way to express this is retained value, the resale price as a percentage of the original price paid.
Retained value at year t = Resale price at year t divided by original price, expressed as a percentage.
Annualised depreciation rate = 1 minus the t-th root of the retained value.
The second formula converts a total decline into a per year rate, which lets you compare vehicles held for different periods on the same basis.
A hypothetical worked example
These numbers are invented for illustration and describe no real model. Suppose a car costs 35,000 including all taxes, and suppose the following retained values apply.
| Year | Retained value | Market value (illustrative) | Depreciation that year | Share of five year loss |
|---|---|---|---|---|
| 1 | 78 percent | 27,300 | 7,700 | 41.5 percent |
| 2 | 68 percent | 23,800 | 3,500 | 18.9 percent |
| 3 | 60 percent | 21,000 | 2,800 | 15.1 percent |
| 4 | 53 percent | 18,550 | 2,450 | 13.2 percent |
| 5 | 47 percent | 16,450 | 2,100 | 11.3 percent |
Total depreciation over five years is 35,000 minus 16,450, which is 18,550. The individual years sum to the same figure: 7,700 plus 3,500 plus 2,800 plus 2,450 plus 2,100. The first year alone accounts for 41.5 percent of the five year loss.
The annualised rate is one minus the fifth root of 0.47. The fifth root of 0.47 is approximately 0.860, so the annualised depreciation rate is about 14 percent a year. That single figure is more comparable across vehicles than any raw amount.
The consequence for when you buy
Take the same invented curve and compare two strategies over a two year holding period. A buyer who takes the car new pays 35,000 and sells at year two for 23,800, losing 11,200, that is 5,600 a year. A buyer who takes the same car at three years old pays 21,000 and sells at year five for 16,450, losing 4,550, that is 2,275 a year. The second buyer’s depreciation cost per year is under half the first buyer’s, for the same two years of use of the same model.
That gap is the reason depreciation deserves attention. It is also incomplete on its own, because the older car carries higher repair risk and no warranty, which is precisely why the total cost of ownership framework exists. Depreciation is the largest line, not the only one.
Why segments behave differently
Retained value is not random. It is driven by supply, demand and running cost expectations in the used market at the moment you sell. The patterns below are qualitative and directional, and they vary by country and by period, so we would treat them as things to check rather than as facts to assume.
- Small city cars. Low absolute purchase price means the absolute loss is small even when the percentage loss is not. Strong demand from budget buyers supports the bottom of the curve.
- Mainstream hatchbacks and saloons. High production volume means abundant used supply, which caps prices, but broad demand keeps the curve orderly and predictable.
- Executive and luxury saloons. Frequently the steepest percentage decline. Large new prices, heavy fleet and lease supply arriving at the same age, and used buyers deterred by maintenance and parts costs.
- Sport utility vehicles and crossovers. Have tended to hold value where demand is strong, though this is a fashion driven segment and fashion reverses.
- Performance and enthusiast models. Wide dispersion. Limited production and manual transmissions can hold value unusually well, while ordinary fast versions of ordinary cars often do not.
- Electric vehicles. Residuals are sensitive to battery health perception, warranty transferability, charging standard obsolescence, subsidy changes on new equivalents, and the pace of range improvement. A new model with materially better range reprices every older one.
- Plug in hybrids. Values are strongly linked to tax treatment, especially company car rules, which means a policy change can move residuals sharply.
- Vans and pickups. Often depreciate more slowly in percentage terms where they are working assets with steady replacement demand.
Vehicle specific factors within a segment
- Colour and specification. Unusual colours and missing common options narrow the pool of future buyers.
- Mileage against the local average. Used pricing penalises above average distance heavily.
- Service history. A complete documented record is often the difference between a normal price and a discount.
- Warranty length and transferability. A long warranty that transfers to the second owner supports the price at the moment it matters.
- Fleet and rental supply. Models sold in volume to fleets arrive on the used market in batches, which depresses prices at predictable ages.
- Model cycle timing. Buying just before a facelift or a full replacement means selling into a market where your version is visibly the old one.
Estimating it for yourself
Do not use a generic percentage. Search current classified listings for the exact model, engine and trim, at the age and mileage you expect to sell at, in the country where you will sell it. That is a real market price today for the car you will own tomorrow. Sample at least ten listings, discard the outliers, and take the middle. Then subtract a realistic allowance for the difference between an asking price and an achieved price, and for trade in being lower than a private sale.
Used vehicle markets, tax regimes and demand patterns differ sharply between countries, and a residual pattern observed in one market does not transfer to another. Verify local values against local listings and speak to a qualified professional about anything with tax consequences. This article is general information and not personalised financial advice, and nothing here suggests that any vehicle is a sound investment.
How to Use This Guide
Every worked example on this page is illustrative. The figures are chosen to show how the calculation behaves, not to report current market rates. Costs, tax rules and eligibility criteria differ by country and change over time, so take the method from this page and put your own current figures into it. Browse the rest of our guides, or see how we source and check our comparison figures on the about page.
Information only. This article explains how costs and rules are structured. It is not financial, tax, legal or immigration advice, and it is not a recommendation to buy any property, vehicle or investment. Confirm anything that affects a decision with the relevant local authority or a qualified professional before you act on it.
Last updated: August 14, 2026