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Depreciation – Why do new cars lose so much money?

Cars lose money the moment you drive them away from the showroom, but why? Here's our crash course in new car depreciation.

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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!

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Stuart Masson
Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive 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.