Depreciation – Why do new cars lose so much money?

Car buying advice Car ownership advice
New car depreciation

It’s an age-old complaint of car buyers around the world – as soon as you drive your shiny new car off the forecourt, it loses a quarter of its value.  Anyone who has tried to sell their new car back to the dealership can certainly vouch for this rather rapid depreciation in their car’s worth.  So why is this the case?

Let’s have a look at where all that money disappears to.  As an example, let’s look at a new car costing £20,000 on the road (including all taxes and charges) as its Recommended Retail Price.

Road tax on your car for its first 12 months is probably going to be somewhere around £150 (it can be anywhere between £0 and £1,000, depending on the car’s CO2 emissions), and the DVLA will also slug you a further £55 administration fee for no good reason other than because they can.  So that’s about £200.

VAT – the Government’s contribution towards depreciation

VAT is the big one – and on a £20,000 car (minus the registration charges) it’s going to come in at about £4,000. That goes straight to HM Revenue and Customs.  So a £20,000 new car is really just under £16,000 + tax.

The dealership has its costs of sales – what it costs them to run the business – which it has to factor into every car it sells.  That means paying staff (the Sales Executive, Business Manager and Sales Manager will all get a commission on each car, plus the admin staff, technicians, cleaners and valets), running a fleet of demonstrators, maintaining the showroom, advertising costs and so on.  It varies across different dealers, brand and locations, but you’d be looking at £1,000 to £2,000 per car.

In addition to covering its costs, the dealership will want to make a profit on every car it sells.  The exact amount will again vary, but it’s fair to guess it could be another £1,000 to £2,000 (although in today’s climate, it could well be a lot less).

So you as the customer might be paying £20,000 for the car, but the dealership may have bought that car for as little as £12,000.  And if that’s what they are paying for a brand new car, how much do you think they are going to pay for your used car (even if it is virtually new)?  Well, there’s no VAT to worry about on a used car (except in certain cases, such as dealer demonstrators), but on the other hand, the manufacturer would rather the dealers sell new cars rather than used cars, so there are sales targets and financial implications relating to how well they perform against those targets.  Plus a customer who can buy a brand new car for £20,000 is unlikely to pay a similar amount for a used car – regardless of why it’s used.  So what was a £20,000 brand new car would probably be offered for sale at £16-17,000 if it was used but ‘as new’.  Take out the dealer’s costs and profit, and you’re probably back to about £12,000 again in terms of what they would buy it from you for.

Depreciation averages out over time

While people bemoan the instant depreciation on their new car, is it really a great problem for car buyers?  If you are going to keep your car for the average 3+ years, then there’s really no need to get too concerned about it.  Over that sort of timeframe, the cost difference between buying new and used diminishes greatly.  Also keep in mind that when you buy a used car, you might not have to worry about VAT, but you will still have to factor in the dealership’s cost of sales and profits – and the costs to prepare a used car for sale may well be a lot higher than for a new car.

The best advice is to remember that cars always cost more than you think when you want to buy one, and are worth less than you think when you want to sell one!

Stuart Masson

Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

10 Comments

  1. If it is the car buyers intention to buy a brand new car and then sell it within a couple of years you really would need to ask the question why? it is better to buy a brand new car with the intention of keeping it long term rather than selling it short term and not getting the same for it as when you bought it, people need to be aware of the depreciation.

    Reply
    • Stuart Masson

      Obviously it depends on your priorities, funding and other requirements, but depreciation is certainly greatest in the first year of ownership. Often circumstances will change as well. There have been many relatively new 2-seat convertible sports cars hurriedly part-exchanged on family cars, for example…

  2. Hi think your VAT analysis is wrong. The value of the car is not diminished automatically by 20% VAT. The value of a used car is relative to what it would cost to buy a new one. To illustrate .. A hypothetical dealer could buy the car back from you a second after you have bought it for the full price and resell it for the same price to someone else without charging any VAT. They would obviously not make any money on the second sale, but they would not have lost 20% and the car would not have lost 20% as you suggest because of VAT. This “you lose 20% as soon as you drive out the showroom” is a plainly misleading story used by salespersons.

    Also please note that for resold vehicles dealers only pay VAT on the net difference between what they paid you for the car and what they sell it on for….the value add.

    Reply
    • stuart

      Your hypothetical example doesn’t work in the real world because a dealer will never buy the car back for the same price – it’s now a used car, which is worth less money. And if the dealer can buy a new car from the manufacturer for £12K, why would they pay the same for your used car? The VAT element is no longer there, but there is still little incentive for a dealer to buy the car back.
      A customer will not pay the same money for a used car as they will for a new car, even if it is essentially brand new. Also, dealerships usually have monetary incentives to sell new cars, so it would cost them more to sell a used car for close to the new car price. Plus, we are still assuming that the new car sold at full price, which is very often not the case.
      Whether or not you consider the VAT component to be an excuse, there is clearly a significant drop in the value of the car as soon as it is purchased. This isn’t supposed to be a scientific analysis, but simply advice to car buyers as to why the value of their new car depreciates so significantly as soon as they buy it.

  3. Hi Stuart, is a second hand price of a low mileage two year old car of £19000 a good deal when the price of the same model new is £23500 (including VAT)?

    Reply
    • stuart

      Well, assuming that the new car is ‘like-for-like’ in terms of specification, then it seems very expensive for a two-year-old car. You could probably pick up a demonstrator model that’s three months old for not much more than that.

  4. I was looking at the rs focus mk2 and these seem to of appreciated in value as opposed to
    Deprecated but the mileage also seemeds to make a massive difference with deprecation
    And you done mention it
    For example a 2009 mk2 rs focus with 5k can be sold for £28,000 and one with 100k can be as little as £15500
    What’s you input on these stats
    Thx
    Steve

    Reply
    • Stuart Masson

      Hi Steve. Some limited-edition models can be worth more than their new car price, especially if they are low-mileage and one-owner vehicles with no modifications. However, this is very rare and often only temporary – especially with reasonably new models like a Mk2 Focus RS. Ultimately it comes down to supply and demand, but normally it takes many years for a car to be considered a classic and enjoy increasing values.

  5. Steve.. I signed an order form for a v/w car,, but I didn’t sign a PCP yet, I paid €200 deposit..

    Can I change my mind??? I’m so overwhelmed, and don’t know what to do, as it’s not an option for me right now financially. I just wasn’t thinking .. Please help! Annie

    Reply
    • Stuart Masson

      Hi Annie. Have a read of this article about changing your mind after buying a car to see if it answers the questions you have.

      You appear to be contacting us from Ireland, in which case the laws in the UK will not be applicable and may be quite different from what you have there. It is most likely that you will lose your deposit, but there’s not usually a lot that a dealer can do to enforce the sale.

What are your thoughts? Let us know below.

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