What is car depreciation? And how does it affect you in 2026?
What is car depreciation?
Depreciation is the loss of value that happens to a car over time. It's not something that's unique to cars — most things you buy, from electronics to furniture, lose value the moment you take ownership — but cars are notable because they tend to depreciate quickly, substantially, and in ways that have a direct impact on how much your purchase actually costs you.
When you buy a new car, you're paying the full market price for that vehicle. The moment you drive it off the forecourt, it becomes a used car, and its value drops accordingly. That drop in value — the difference between what you paid and what you could sell it for today — is depreciation. It continues throughout the car's life, though the rate slows considerably as the car gets older.
Understanding depreciation matters whether you're buying, selling, or financing a car. It determines the real cost of ownership, affects how much you'll get when you come to sell or part exchange, and sits at the heart of how PCP finance payments are calculated.
How is depreciation calculated?
The calculation is straightforward. Take what a car is worth now and subtract it from what it cost when you bought it — the difference is the amount it has depreciated.
So if you buy a car for £20,000 and it's worth £12,000 three years later, it has depreciated by £8,000 — or 40% of its original value. You'll sometimes see this expressed as a retention or residual value: in this case, the car retains 60% of its value, or has a residual value of 60%.
The rate of depreciation — how quickly a car loses value — varies significantly by make, model, age, mileage, and market conditions. It's not a fixed percentage per year; it's a curve that typically steepens sharply in the first year and then flattens gradually as the car ages.
How much do cars depreciate?
A new car typically loses the most value in its first year on the road. Historically, new cars could lose anywhere from 10% to 35% of their value in the first twelve months. By the end of three years, many mainstream new cars will have lost between 40% and 60% of their original list price — sometimes more on models with weak residual values.
Beyond the three-year mark, depreciation slows significantly. A car that's lost most of its depreciation — one that's already five or six years old — might only lose a further 5–10% per year. By ten years, some cars are losing as little as 1–2% annually.
This curve is why used cars represent such good value relative to new: someone else has absorbed the steepest portion of the depreciation, and you're buying in at a point where future value loss is much more gradual.
What causes a car to depreciate?
Several factors drive how quickly a car loses value, some of which you can control and some you can't.
Mileage. This is the most obvious one. The more miles a car covers, the more its mechanical components are worn, and the less it's worth. High mileage also signals heavier use to future buyers, which reduces demand and therefore price.
Age. Older cars are generally worth less than newer ones, even at similar mileage, because newer models typically offer more technology, safety features, and fuel efficiency.
Condition. Dents, scratches, interior wear, and missing service history all reduce a car's market value. A well-maintained car with a full service history will depreciate more slowly than a neglected equivalent.
Supply and demand. Popular models in strong demand hold their value better than less sought-after ones. If a manufacturer discontinues a model, or if demand shifts — as it did for diesel cars following the 2017 emissions scandal — residual values can fall sharply and quickly.
Running costs and emissions. Cars with high running costs — expensive fuel, high insurance groups, or large road tax bills — tend to depreciate faster because buyers factor those ongoing costs into what they're willing to pay. Clean air zone charges have accelerated diesel depreciation in many UK cities.
Reliability reputation. Brands and models known for reliability hold their value better. Toyota and Lexus consistently produce some of the lowest-depreciating cars in any segment, largely because of their reputation for longevity.
Which cars depreciate the fastest in 2026?
Some car types have a structural depreciation problem that makes them poor choices as new purchases but excellent choices as used buys.
Large luxury saloons have historically been among the fastest depreciating vehicles. Cars like the Mercedes-Benz S-Class, BMW 7 Series, and Audi A8 lose value quickly in the new car market because the pool of buyers for them is relatively small, yet manufacturers produce them in significant volumes. The same car that costs £90,000 new may be available used at a fraction of that price after three or four years.
Large MPVs and people carriers have fallen dramatically in residual value as SUVs have displaced them in popularity. Cars like the Ford Galaxy and Citroen Grand C4 Spacetourer can represent extraordinary value as used buys for exactly this reason.
Early-generation electric vehicles have been a notable depreciation story in recent years. First and second-generation EVs — particularly those with more modest range or older battery technology — have seen steep falls in value as newer models with greater range and more advanced features have entered the used market. Buyers who financed EVs at the inflated prices of 2021–2022 (when new car supply shortages pushed used values to historic highs) have been particularly affected as the market has normalised through 2023–2025.
Diesel cars continue to face above-average depreciation pressure in 2026. Ongoing expansion of low emission zones in UK cities, rising road tax on higher-emission vehicles, and a general shift in consumer sentiment have continued to weigh on diesel residual values — particularly on older, higher-emission models.
Which cars hold their value best in 2026?
At the other end of the spectrum, some cars are notably resistant to depreciation — which means they cost more to buy used, but are also more likely to retain value if you come to sell them.
Toyota and Lexus full hybrids are consistently among the best performers. The Toyota Yaris Hybrid, RAV4 Hybrid, and Lexus UX regularly appear in low-depreciation rankings. Proven reliability, strong demand, and the absence of charging infrastructure concerns (full hybrids are self-charging) all contribute to resilient residual values.
Small, popular city cars and superminis with strong brand followings tend to hold value well. High demand relative to supply keeps prices supported. Models that have been discontinued — like the Ford Fiesta — can also see residual values supported as supply of good used examples tightens over time.
Well-specified SUVs in the mid-size segment have strong residuals, driven by consistent demand from family buyers. Models like the Nissan Qashqai, Kia Sportage, and Volkswagen Tiguan have historically depreciated more slowly than many equivalently priced alternatives.
Performance cars and classic cars can be an exception to most depreciation rules. Some models appreciate in value over time rather than depreciating — particularly rare or limited-edition versions. This is a specialist area and shouldn't be assumed to apply broadly.
Why depreciation matters for car finance
If you're buying a car on PCP finance, depreciation is baked directly into the cost of the deal. PCP payments are calculated on the difference between the car's purchase price and its guaranteed future value (GFV) — the amount the lender estimates it will be worth at the end of the finance term. That difference is the depreciation you're effectively paying for over the contract period.
A car with strong predicted residual values will have lower PCP monthly payments than an equivalent car with weaker residuals, even at the same price and same APR — because you're paying for less depreciation. This is why full hybrid models from Toyota and Lexus often have very competitive PCP payments despite their strong used values.
Conversely, a car with weak residual values will have higher PCP payments, because the lender is setting the GFV lower to protect against the expected value drop. Understanding this means you can make a more informed decision when comparing finance deals across different models.
How to avoid losing too much to depreciation
The most effective way to minimise depreciation loss is straightforward: don't buy new. The steepest depreciation happens in the first year or two. Buying a well-maintained used car that is two to four years old means someone else has absorbed that initial drop and you're entering the ownership curve at a much shallower gradient.
Choosing models with strong residual values also helps. If you buy a car that holds its value well, you'll recoup more when you come to sell or part exchange. Maintained service history, sensible mileage, and good condition all support residual value and make a car easier to sell at a fair price.
If you buy used from a dealer that prices below market value — as Carsa does — you start with an immediate advantage: the car is already priced below what the market says it's worth, which creates a buffer before depreciation would otherwise put you underwater.
There's one more consideration that's often missed: the total cost of ownership. A slightly faster-depreciating car that's cheaper to insure, cheaper to fuel, and cheaper to service may produce a better financial outcome overall than a slower-depreciating car with high running costs. Depreciation is the biggest cost for most drivers, but it needs to be considered alongside everything else.
Find used cars that have already absorbed the biggest depreciation
Every car at Carsa is a used car priced on average £700 below market value — which means the previous owner has absorbed the steepest part of the depreciation curve, and you're starting your ownership at a point where value loss is far more gradual. Finance is available from 8.9% APR, and every car comes with a 90-day warranty as standard.
If you have a car to sell or part exchange, you can get a free valuation at any time — no obligation, no pressure.
Get a free valuation for your current car →
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