A car depreciates in value by 15% per year. If it is worth $20,000 now, what will it be worth in 3 years?

Understanding Car Depreciation: How Much Will a $20,000 Car Be Worth in 3 Years?

When buying a vehicle, one of the most important financial realities investors and buyers face is car depreciation—the steady drop in a car’s value over time. Understanding how much depreciation affects your investment helps make smarter purchasing and long-term financial decisions. If your vehicle depreciates by 15% per year, and it’s currently worth $20,000, how much will it be worth in 3 years? Let’s break it down.

Understanding the Context

What Is Car Depreciation?

Car depreciation refers to the decline in a vehicle’s market value as it ages and accumulates mileage. Unlike some assets, cars lose a significant portion of their value soon after purchase—often starting with 20-30% in the first year. Even after that, annual depreciation continues at a steady pace, averaging 15% per year for many vehicles.

How Depreciation Works: The 15% Annual Rate

A car depreciates in value by 15% per year. If it is worth $20,000 now, what will it be worth in 3 years?

Key Insights

Depreciation of 15% per year means that each year, the car’s value is multiplied by 0.85 (which equals 100% – 15% = 85%). This compound effect turns out to significantly reduce value over time.

Let’s calculate the value step by step for 3 years.

Year 1:

Initial value: $20,000
Depreciation: $20,000 × 15% = $3,000
New value: $20,000 – $3,000 = $17,000

Year 2:

Value at start: $17,000
Depreciation: $17,000 × 15% = $2,550
New value: $17,000 – $2,550 = $14,450

Year 3:

Value at start: $14,450
Depreciation: $14,450 × 15% = $2,167.50
Final value after Year 3: $14,450 – $2,167.50 = $12,282.50

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Final Thoughts

Summary Table: Value Over 3 Years

| Year | Starting Value | Depreciation (15%) | Ending Value |
|------|----------------|--------------------|---------------|
| 0 | $20,000 | – | $20,000 |
| 1 | $20,000 | $3,000 | $17,000 |
| 2 | $17,000 | $2,550 | $14,450 |
| 3 | $14,450 | $2,167.50 | $12,282.50 |

Why Depreciation Matters

Even though depreciation is inevitable, understanding the 15% per year rate helps you manage expectations:

Financing and trade-in values: Knowing depreciation ensures you’re prepared when selling or trading in.
Long-term ownership: While cars lose value, they often remain reliable transport—learning to budget for replacement costs is crucial.
Investment mimic: Unlike stocks, most cars do not appreciate, making ownership a depreciation play rather than growth.

Tips to Slow Depreciation (Limited Room)

While it’s natural for cars to lose value quickly, some factors can slightly slow depreciation:

Buy a high-demand model with strong resale appeal (e.g., hybrids or SUVs).
Maintain detailed service records to justify higher resale value.
Keep the car clean and well-used; added features or conditions can help.