Going electric? I get it – making the switch to an EV is exciting! But before you take the plunge, let’s talk about depreciation to understand how much that shiny new EV will be worth down the road. The good news? Electric vehicles maintain their value better than gas-powered cars. After being driven for 3 years, EVs still keep about 49% of their original price. Gas cars drop in value faster during the same time period. Nice! But many things impact how quickly your EV drops in value – mileage, age, battery health, etc. So, in this guide, I’ll break down depreciation in simple terms to help you make a smart choice if you’re EV shopping. Sound good? Then, let’s dive in!

 

What is Depreciation?

Depreciation refers to the decrease in value of an asset over time. While some assets like property or rare items may increase in value, most cars, including electric vehicles (EVs), lose value. But what does this mean for you as an electric car owner or potential buyer? In the car industry, depreciation is often measured using “residual value .”This is the percentage of the original price remaining after 3 years or 36,000 miles. For example, if a car loses 60% of its value during this time, its residual value is 40%. A lower residual value is usually not good for the owner, as the asset has lost a significant part of its value. 

Electric cars are a bit different here. Industry data shows electric cars, on average, keep about 49% of their value after 3 years, which is better than petrol and diesel cars. This is likely because demand for electric cars is growing, especially as countries move to ban new petrol and diesel car sales. Also, the condition of the electric car battery matters for depreciation. Studies show most electric car batteries last 15-20 years, often outlasting the car itself. This longevity leads to higher residual values for electric cars compared to fossil fuel cars. So, understanding depreciation is important not just financially but also for making informed decisions about owning an electric car. It affects not just resale value but total cost of ownership, making it a key factor when entering the electric car market.

 

Types of Depreciation

Understanding depreciation is important for electric car owners and buyers. Two common Types of Depreciation are Straight-Line Depreciation and Reducing Balance Depreciation.

 

Straight-Line Depreciation

With Straight-Line Depreciation, the asset loses value at a constant rate over its useful life. For example, a $40,000 electric car with a 10-year life would depreciate $4,000 yearly. However, this may not fully capture electric car depreciation. Data shows electric cars retain about 49% of value after three years, suggesting a more complex pattern than a straight line.

Straight-line depreciation assumes equal annual depreciation. But electric cars tend to depreciate faster initially then slower later on. It also does not account for changing market conditions affecting values each year. Since electric vehicle technology rapidly evolves, straight-line methods may over- or under-estimate depreciation in certain years.

 

Reducing Balance Depreciation

Reducing Balance Depreciation is often more accurate for cars. With this method, the asset loses value annually at a fixed percentage of its remaining value. Electric cars lose around 60% of their value after three years at 10,000 miles yearly. Reducing balance depreciation better reflects how electric cars rapidly lose value in the early years and then level off. It accounts for evolving consumer preferences and technology improvements that accelerate depreciation. This method provides a more realistic view of declining electric car values over time.

 

 

Why Electric Car Depreciation Matters

Depreciation has real-world importance for electric car owners and buyers for several key reasons:

 

Resale Value

Faster depreciation means electric cars lose more value yearly compared to gas cars. A Transport Policy study found EVs depreciate 13.9% annually, while gas vehicles depreciate 10.4% annually. Understanding expected depreciation rates helps make informed buying and selling decisions by providing realistic resale value estimates. Monitoring depreciation rates is crucial to project potential resale prices. Strong consumer demand for used EVs may buoy values, but technology improvements also accelerate depreciation. Accurately factoring in depreciation provides reasonable resale expectations.

 

Total Cost of Ownership

Depreciation significantly affects an electric car’s total lifetime ownership cost. Batteries can constitute 40% of production costs. Well-maintained batteries may mitigate rapid depreciation, lowering the overall cost of ownership. Knowing projected depreciation provides a clearer lifetime cost outlook. TCO(Total Cost of Ownership) captures the financial reality of owning an electric car. Higher depreciation makes EVs seem more expensive unless incentives offset it. Understanding expected depreciation gives a more accurate total ownership cost perspective.

 

Financial Planning

Insurers, banks, and governments use depreciation rates to set policies, loan terms, and subsidies. Anticipating an electric car’s depreciation helps better plan finances. For example, expecting fast depreciation could lead to choosing a shorter loan term or higher down payment. On the other hand, saving the depreciation amount can hedge against steep price drops when reselling.

 

Environmental Incentives

Purchase incentives and preferential tax treatment for electric cars counterbalance higher depreciation rates, improving cost competitiveness. Special depreciation deductions for company EVs account for fast depreciation while motivating sustainability.

 

Factors Affecting Depreciation

Depreciation for electric cars is not one-size-fits-all. Several key factors can influence how quickly an electric vehicle loses value:

 

Battery Life

Battery condition significantly impacts depreciation. Most electric car batteries last 15-20 years, often outliving the vehicle. This longevity can reduce depreciation if highlighted to potential buyers. 

 

Brand Value

Brands known for reliability tend to depreciate less. For example, Tesla models are renowned for slow depreciation. The Model 3 retains about 60% of its value after three years, far better than average. Strong brand value and loyalty boost resale appeal.

 

Age and Mileage

Older cars with higher mileage normally depreciate faster. However, electric cars are an exception due to long-lasting batteries and fewer mechanical parts wearing out. Lower maintenance needs and battery replacement options help mitigate age/mileage depreciation.

 

Government Incentives

Incentives like tax exemptions and clean air zones make electric cars more appealing, helping retain value versus gasoline models. Special EV credits and perks offset higher depreciation rates, supporting resale pricing.

 

Mitigating Depreciation

You can’t completely stop depreciation, but you can slow it down. Here are strategies to consider:

 

Maintenance Tips

Regular maintenance is key for retaining electric car value. According to Finder Canada, timely servicing and full maintenance records make your car more valuable. This includes everything from battery checks to tire rotations. The cleaner and better maintained your EV is, the slower it will depreciate. Stick to manufacturer-recommended service intervals.

 

When to Sell

Selling timing significantly impacts depreciation. Finder suggests gauging the market before selling your electric car. For example, selling a convertible in winter may fetch less money. If your EV model was just updated or discontinued, resale value could decrease. The best time to sell is before hitting a major depreciation milestone like a certain age or mileage.

 

Color and Modifications

Believe it or not, color affects depreciation. Standard colors like white, black, silver, and gray maintain value better. Non-standard modifications like performance upgrades can also reduce value. If customizing your electric car, consider the impact on depreciation.

 

 

Case Studies

Let’s examine real-world examples to better understand electric car depreciation. The Tesla Model 3 and Nissan Leaf illustrate how real-world factors impact electric vehicle depreciation. The Model 3 retains value well thanks to Tesla’s over-the-air updates, strong battery reputation, minimal maintenance costs, and purchase incentives that reduce long-term ownership costs. In contrast, the Leaf depreciates much quicker due to its battery losing capacity rapidly within 5 years, which hurts resale value significantly. The Leaf is also impacted by tax credits not applying to used EVs, forcing sellers to reduce prices. In summary, aspects like battery technology, maintenance costs, and purchase incentives affect depreciation, as demonstrated by the low depreciation of the Model 3 compared to the higher depreciation of the Leaf. Comparing real-world examples provides insight into the variables that either accelerate or slow electric vehicle value loss.

 

How fast do electric cars depreciate?

Electric cars lose value at a slower rate than most other cars. After being driven for 3 years or 36,000 miles, an electric car will typically be worth about 49% of its original price. This is better than gasoline and diesel cars, which tend to depreciate faster over the same time period. In summary, electric cars hold their value better than other types of vehicles.

 

Does the brand of the electric car affect its depreciation?

Yes, the electric car brand affects how quickly it loses value. Electric cars from brands known for reliability and low operating costs tend to depreciate more slowly. For example, the Porsche Taycan and Tesla Model 3 are among the electric cars that lose their value the slowest. Electric cars from trusted, established brands hold their value better than less proven brands. So, the manufacturer brand is an essential factor in an electric car’s depreciation rate.

 

How does mileage affect electric car depreciation? 

Mileage plays a significant role in how quickly an electric car loses value. In general, the older a car is and the more miles it has been driven, the less it is worth. However, electric cars are in high demand right now, which helps them retain their value better than gas-powered cars as they age and accumulate miles. So, while mileage does affect the depreciation of electric cars, they tend to hold their value better than traditional cars with the same mileage.

 

What is the lifespan of an electric car battery? 

Electric car batteries usually last a long time, around 15 to 20 years. This is often longer than the car itself! The companies that make the batteries offer a separate warranty for the battery, too, around 8 years. This warranty covers any problems with the battery during those 8 years after you buy the car. So, electric car batteries tend to keep working well even as the vehicle gets older.

 

Conclusion

While EVs typically have slower depreciation than gas cars, many factors influence the depreciation rate of electric vehicles. The brand, age, mileage, battery life, and market demand all affect an EV’s value over time. Government subsidies and the technological advances happening frequently also impact depreciation. With EVs constantly improving, the rates are continuously changing. It’s important to keep up with these variables to make the most informed financial decision. As an electric car owner or prospective buyer, researching depreciation can help guide you in economically sound and environmentally sustainable choices. Whether purchasing your first or next vehicle, understanding depreciation allows you to maximize your investment in electric transportation now and in the future.