Why cars depreciate the way they do

Car depreciation calculators — including the one above — usually simplify the curve to a single constant annual rate, like 18% a year, because it’s tractable to compute and close enough to be useful for loan planning. The real curve isn’t constant at all: it drops sharply in the first year, then loses value more slowly, and more slowly still, as the car ages.

Depreciation isn’t a straight line

What drives each stage of the curve

The steep first-year drop happens largely because the car stops being “new” the moment it’s registered — buyers pay a premium for a car with zero kilometres and a full manufacturer warranty that a technically identical car with one year of use and one year of mileage doesn’t command. After that initial hit, depreciation slows and tracks more mundane factors: accumulated mileage, wear and tear, how the model has aged relative to newer versions, and eventually the car simply becoming old enough that most of the value loss has already happened.

What this means when you use a constant-rate calculator

A constant-rate model like the one used above is a reasonable approximation for estimating your underwater period on a loan, since that risk is concentrated in the early-to-middle years where the two curves aren’t too far apart. Where it gets less accurate is longer-term resale planning: if you’re estimating what a car will actually be worth five or more years out, a constant-rate model tends to understate its value, since the real curve’s rate of decline keeps easing while a constant percentage doesn’t. Treat a constant-rate depreciation estimate as a reasonable planning tool for the loan itself, and a conservative floor — not a precise forecast — for what the car will actually fetch on resale years down the line.