LoginHow Your Vehicle Will Depreciate Over its First 5 Years
Are you in the market to buy a car? This valuable article will provide you with a wealth of information on how to think about your depreciation of your asset and what this could mean to your pocket, and how to protect yourself against it.
How Your Vehicle Will Depreciate Over its First 5 Years
The delivery of a new vehicle is always an exciting time, but it comes with a downside: depreciation.
Vehicles lose value rapidly over time, but mostly during their first five years. This can leave you vulnerable to financial loss if your vehicle is stolen or written off in an accident whether it’s your fault or not.
What is vehicle depreciation?
Depreciation is the decline in a vehicle’s market value over time that is influenced by age, mileage, wear and tear, and market demand. This breakdown shows how depreciation impacts the average UK vehicle’s value over each of the first five years:
Year 1 sees the steepest drop
A brand new vehicle loses 15-35% of its purchase value in the first year, with some models dropping as much as 40%.
For example, a £30,000 vehicle might be worth just £18,000 – £21,000 after the first 12 months. This begins the moment it’s driven off the forecourt, as the vehicle is no longer considered new.
Years 2 and 3 continue the decline
Depreciation slows slightly during this time but is still significant, with vehicle losing an additional 10-20% of their value for each of these years.
By the end of year three, the average vehicle is worth 40-60% of its purchase price. This means that a £30,000 vehicle could be worth just £12,000 – £18,000, depending on its make, model, and condition.
Years 4 and 5 gradually slows
By years four and five, depreciation tapers off but will still see a loss of around 5-10% each year.
At the end of the five year period, a typical vehicle will retain just 25-40% of its purchase value. So, that £30,000 vehicle might now be worth only £7,500 – £12,000.
What influences depreciation?
Luxury cars, electric vehicles, and models with poor reliability ratings often depreciate at a much faster rate. On the other hand, more popular models generally retain a much strong resale value. Mileage, service history, maintenance of the moving parts, as well as the internal and external bodywork, and market trends also play a role.
What is the financial risk of depreciation?
If your vehicle is written off or stolen, your comprehensive motor insurer will only settle the current market value of your vehicle at the time of the loss, and not the amount you originally paid for the vehicle, or the amount you still owe on a finance agreement.
This creates a shortfall between the insurance payout amount and your financial obligations, leaving you out of pocket. For example:
- If you bought a vehicle for £30,000 on finance agreement, you’ll still owe around £25,000 after the first two years.
- If your vehicle is then written off, its market value will be just £15,000.
- Your comprehensive motor insurer will settle the £15,000, which is the current market value, leaving you with a £10,000 shortfall on your remaining finance, as well as any added early settlement penalties.
This gap would create a significant financial burden, especially when you want to purchase a suitable replacement vehicle. Even if you bought your vehicle for cash, you will no doubt undergo financial strain without a cash deposit.
What protection is available?
GAP Insurance bridges the difference between your motor insurance payout and the purchase price of your vehicle, or your outstanding finance amount plus early settlement penalties.
Here’s what you can expect:
- Covers the financial shortfall
If your vehicle is written off or stolen, GAP insurance ensures you won’t be left out of pocket by pay you the difference between your comprehensive motor insurance settlement and the original invoice price you paid for the vehicle. This ensures you won’t be left paying for a vehicle they no longer have. - Protects against depreciation
With the steepest value loss occurring in the first five years, GAP Insurance is especially valuable if you have a new or relatively new vehicle and will often provide cover up to 7 years old (at policy start date) and up to 80,000 miles, offering flexibility if you are planning to buy a new or a used vehicle. - Peace of mind for financed vehicles
Over 90% of new cars in the UK are purchased on finance according to the Finance & Leasing Association (2023). If you are planning on buying with a finance agreement, this could leave you at risk of owing more than your vehicle is worth. GAP Insurance will ensure your outstanding finance amount is settled, preventing any negative equity and allowing you to move forward without debt. - Additional benefits
GAP insurance offers UK driver great tailored benefits:
- Protection against negative equity: Many financed vehicles are worth less than the loan balance early in the agreement, especially with longer-term deals. GAP Insurance will prevent you being stuck with debt after a loss.
- don’t affect your no-claims bonus, keeping your future premiums low.
- Flexible coverage: Policies can be customised to match the length of your finance agreement, ensuring you’re protected for the period most at risk.
Why Gap Insurance is essential in the UK
The 2025 Motor Ombudsman report noted that repair and replacement costs are continuing to climb, making total losses more common. GAP insurance ensures you aren’t left paying off a loan for a vehicle you no longer have, offering you financial stability in a worst-case scenario.
GAP insurance is a smart safeguard against the financial sting of depreciation. By covering the gap between the comprehensive motor insurer’s payout and any remaining finance obligations, it protects your wallet and lets you enjoy your vehicle without worry. Whether it’s cruising in a new hatchback or a financed SUV, GAP Insurance will ensure a total loss doesn’t derail your finances.
