Depreciation is almost always the largest cost of running a car, and it is the one that never appears on a receipt. It behaves as a declining balance rather than a straight line: each year the car loses a percentage of what it was worth at the start of that year, not a fixed sum. That is why the pound loss is enormous early on and tapers as the car ages.
The first year is a special case and deserves its own rate. A new car typically loses somewhere around 20 to 30 per cent the moment it stops being new, and the exact figure varies enormously by model, fuel type and how strong demand is for that particular car used. Some models hold value far better than the average and a few have lost half their value inside twelve months, so both the first-year drop and the ongoing rate are editable inputs here rather than fixed assumptions.
A £28,000 car losing 25 per cent in year one and 18 per cent a year thereafter is worth £11,579 after 4 years, a residual of 41.4 per cent. That is £16,421 gone, or £4,105 a year. Spread over 10,000 miles a year it works out at 41.1 pence per mile before a drop of fuel is bought.
The formula
price- Purchase price paid
first-year drop- Percentage lost in the first year, typically 20-30% on a new car
annual rate- Declining-balance percentage lost each year afterwards
years- How long you keep the car
How to use this calculator
- Enter what you paid for the car.
- Set the first-year drop — 20 to 30 per cent is typical for a new car, far less for a used one.
- Set the ongoing annual rate and how many years you plan to keep it.
- Enter your annual mileage to see depreciation expressed in pence per mile.
Worked examples
£28,000 kept for 4 years
Year one takes 25 per cent, leaving £21,000. Three further years at 18 per cent of the remaining balance give £11,579 — a residual of 41.4 per cent and £16,421 lost, or £4,105 a year.
Buying at three years old instead
The same car bought at three years old costs about £14,120. Keeping it four years at 18 per cent leaves £6,384, a loss of only £7,736 over the same period — roughly half the cost of owning it from new.
How to read your score
Frequently asked questions
How big is the first-year drop really?
For a typical new car, somewhere around 20 to 30 per cent, and it varies enormously by model. Strong residual performers can hold 85 per cent after a year while heavily discounted or out-of-favour models have lost close to half. Treat any single figure as a starting assumption and adjust it for the specific car.
Why declining balance rather than straight line?
Because it matches how the used market actually behaves. A percentage of the remaining value produces a steep early loss that tapers as the car ages, which is exactly the shape of real trade guide data. Straight-line depreciation would badly overstate the loss in later years.
Does mileage affect the rate?
Substantially. Above-average mileage typically costs extra value at each valuation point, and very high mileage can push a car below the point where a dealer will retail it at all. If you cover a lot of miles, raise the annual rate by a few percentage points.
What else drives the rate up or down?
Condition and service history, colour and specification, whether the model is about to be replaced, and shifts in fuel-type demand. Warranty length matters too — a car falling out of manufacturer warranty often takes a visible step down in value.
Should depreciation count as a running cost?
Yes, and it is usually the biggest one. On a reasonably new car, depreciation per mile commonly exceeds fuel per mile. Ignoring it is the main reason people underestimate what their car actually costs to run.
Residual value reference
| Years held | 12%/yr | 15%/yr | 18%/yr | 22%/yr | 25%/yr |
|---|---|---|---|---|---|
| 1 year | £21,000 (75%) | £21,000 (75%) | £21,000 (75%) | £21,000 (75%) | £21,000 (75%) |
| 2 years | £18,480 (66%) | £17,850 (64%) | £17,220 (62%) | £16,380 (58%) | £15,750 (56%) |
| 3 years | £16,262 (58%) | £15,172 (54%) | £14,120 (50%) | £12,776 (46%) | £11,812 (42%) |
| 4 years | £14,311 (51%) | £12,897 (46%) | £11,579 (41%) | £9,966 (36%) | £8,859 (32%) |
| 5 years | £12,594 (45%) | £10,962 (39%) | £9,495 (34%) | £7,773 (28%) | £6,645 (24%) |
| 6 years | £11,082 (40%) | £9,318 (33%) | £7,786 (28%) | £6,063 (22%) | £4,983 (18%) |
| 8 years | £8,582 (31%) | £6,732 (24%) | £5,235 (19%) | £3,689 (13%) | £2,803 (10%) |
| 10 years | £6,646 (24%) | £4,864 (17%) | £3,520 (13%) | £2,244 (8%) | £1,577 (6%) |
Declining balance: value = price x (1 − first-year drop) x (1 − rate) to the power of years − 1. Every figure recomputed, not interpolated.