Car depreciation – and how leasing can help you avoid it

However you choose to finance your new car – HP, car loan, or maybe you have the readies in the bank – there is one inescapable result the moment you drive  your brand new and very shiny car away from the dealership.

The car will shed pounds. Not weight, but sterling pounds.

Depreciation is the rather hard fact of new car ownership. It is the rate at which a vehicle loses its value over time.

Generally, a new car will suffer the steepest loss in the first year and by the end of its third year will have lost roughly 60% of its new car value. The depreciation curve then tends to flatten out as the car gets older; by year eight it will, on average, hold some 20% of its new car value.

So, for example, a car costing £20,000 new will have a resale value of around £4000 in about eight years. It’s a sobering thought.

There are other factors affecting new car depreciation. These include the mileage, the condition of the car, and the type of the car. For example, large, luxury vehicles lose value more quickly than smaller supermini types.

But there’s not much you can do about car depreciation. It remains a significant financial blow, especially when you decide to sell or trade-in your vehicle.

Or is there?

One way to avoid some of the harsh realities of car depreciation is to buy used at three or four years old and therefore avoid the heftiest amount of the depreciation. The downside to this is you are buying a used car, rather than a new car.

But what if you want a new car?

And if you want a new car, how can you protect against car depreciation? One potential solution is car leasing.

Car leasing is essentially a long-term rental agreement. You pay a fixed monthly fee to use a vehicle for a set period of time, usually between two to four years, and over an agreed mileage, anywhere between 5000 miles a year to 20,000 miles a year if you are a high mileage business driver. The primary advantage of car leasing is that you do not own the vehicle – it is owned by the leasing company – which means the risk of depreciation does not fall on you.

A further advantage of leasing is that your payments are fixed over the term, and to add greater motoring certainty you can add a maintenance agreement. This not only covers routine servicing, but covers you for other items such as replacement tyres and windscreens, which means you can fix all your motoring costs in a monthly budget, bar the fuel (petrol, diesel or electricity) and the insurance.

At the end of the lease term, you simply return the car to the leasing company. It’s then down to the leasing company to sell the vehicle and deal with the loss in value.

A further advantage is that leasing allows you to drive a new car every two to three years, ensuring you will always be in a model with the latest features and technologies, which is especially true at the moment as developments in electric vehicle technology increase at pace.

There are certain aspects of leasing that you need to be aware of. While you don’t own the car, you are still responsible for its condition, and there may be financial penalties if there is excessive wear and tear on the vehicle.

By this, we are talking about crunched alloy wheels, damaged bumpers, tears in the interior, for example. And there are also limits to your mileage which you agree to at the beginning of your car lease. If you exceed the agreed mileage over the period of the lease, there will be an excess mileage amount to pay – this is specified in pence per mile at the commencement of your agreement. But if you find you are driving more miles than you anticipated during the course of your lease, then you can alway call the leasing company and in most cases they will be able to change the conditions of the lease, although you should be aware that this will increase the monthly rental cost.

But for many people, the benefits of leasing – and its simple pay for use concept – outweigh these considerations.

What’s more, car leasing can be a practical way to enjoy driving a new car without bearing the brunt of depreciation. It offers predictable costs, the pleasure of frequently updating your vehicle, and the luxury of not having to worry about the resale value. It’s certainly one way to dodge the bullet of car depreciation.