Depreciation is the cost of car ownership that nobody sends you a bill for, which is why most people never add it up. A new car sold in the UK typically loses between 15 and 35 per cent of its price in the first year and around half by the end of the third, and on a car under five years old that loss is usually bigger than fuel, tax and insurance combined. Leasing does not make depreciation disappear; it turns it into a monthly figure calculated in advance and adds the ways you can be charged if the car comes back worth less than forecast. This guide explains how depreciation works, how a lease price is built from it, and the decisions before, during and at the end of ownership that decide how much you actually lose.
- A personal contract hire payment is the car's forecast depreciation over the term, divided into months, plus the finance company's interest and margin. A cheap lease on an expensive car means the funder expects it to hold its value.
- The four things that most affect what a car is worth at the end are its mileage, its condition against the BVRLA fair wear and tear standard, its service history and whether it is a model and specification the used market wants.
- Excess mileage on a UK lease is typically charged at between 5p and 15p a mile plus VAT. Damage beyond fair wear and tear is charged at the lessor's repair rate, which is usually higher than a local bodyshop.
- On a PCP the equivalent number is the guaranteed minimum future value: if the car is worth more at the end you have equity to use as a deposit; if it is worth less you can hand it back and walk away.
How depreciation actually behaves
A car loses value in a curve, not a line. The steepest fall is the first year, when it stops being new; the curve flattens through years three to six; and by eight to ten years most mainstream cars have settled to a value driven by condition and mileage rather than age. The curve is steeper for models the market does not trust and flatter for the ones it does, which is why a three-year-old Porsche or Toyota can be worth 60 per cent of its price and a three-year-old executive saloon from a less loved brand 35 per cent. Between 2023 and 2025 electric cars fell faster than the market average as new prices were cut and used demand lagged, and that is the single biggest reason EV lease prices rose during the same period: the funders had guessed the residual values wrong and repriced.
What a lease payment is made of
A personal contract hire agreement starts from three numbers: the price the funder pays for the car, the residual value it expects the car to fetch at the end of the term, and the interest rate. Price minus residual value is the depreciation the funder needs to recover. Spread over the term and added to the interest, the funder's margin and any admin fees, that is the monthly rental. The initial rental, quoted as three, six or nine months, is simply a larger first payment that reduces the rest; it is not a deposit and it is not returned. The mileage allowance is part of the residual-value forecast, which is why a lease at 8,000 miles a year is cheaper than one at 15,000: the funder expects a lower-mileage car to be worth more.
The useful consequence is that lease prices are a public verdict on residual values. If one model leases for noticeably less than a rival with the same list price, the funders expect it to depreciate less. That verdict is also worth reading if you intend to buy rather than lease.
Choosing the car: the decisions that matter most
Model and brand. Residual values are published for the trade by CAP HPI and Glass's and you will not see them, but the lease comparison sites let you infer them. The models that hold value are the ones with steady demand: mainstream SUVs and hatchbacks from brands with a reliability reputation, and a small group of desirable premium and performance cars. Large saloons, unusual body styles and cars at the end of their model cycle depreciate hardest.
Specification. The used market pays for the options it can see and understand: metallic paint in a neutral colour, a mid-range trim, an automatic gearbox on anything larger than a supermini, parking sensors and a reversing camera, heated seats. It does not pay back the cost of a large wheel upgrade, a premium sound system or an unusual colour, and a car in a colour that dealers struggle to sell can be worth several hundred pounds less than the same car in grey.
Timing. A car registered just before a facelift or a new generation falls harder in its first year than one registered after. The March and September plate changes bring discounts on new cars and a glut of part-exchanges onto the used market, which lowers prices for sellers and raises them for buyers.
During ownership: protecting the value
Mileage is the biggest lever you control. Every 1,000 miles above the average for the car's age costs money at resale, and on a lease every mile above the allowance costs the excess rate. If your mileage is going to exceed the agreement, most funders will let you increase the allowance mid-term for a higher monthly rental, which is almost always cheaper than paying the excess at the end.
Service history is the second. A car serviced on schedule at a franchised dealer or an independent using manufacturer-approved parts and oil keeps its warranty, passes the funder's inspection and sells for more; a gap in the history is read as neglect even when it was forgetfulness. Keep every invoice and make sure the service is recorded in the digital service record most manufacturers now use instead of a stamped book.
Condition is the third. Kerbed alloy wheels, small dents, stone chips, scuffed bumpers and interior stains are individually cheap to fix and individually charged for at the end of a lease. The BVRLA's Fair Wear and Tear Guide, which most UK lessors use, sets out what is acceptable: for example, a single scratch under 25 mm that has not gone through the paint is fair wear; a dent bigger than a 10p coin or any damage to a tyre sidewall is not. Fixing damage yourself through a mobile repairer or a local bodyshop before the inspection almost always costs less than the lessor's recharge, and the tyres should be a matching set with legal tread.
Modifications reduce value on almost every car. Remapping, aftermarket exhausts, lowered suspension, tinted windows beyond the legal limit and non-standard wheels all make a car harder to sell, can breach a lease agreement, and must be declared to your insurer, which is a separate problem covered in our guide to modified car insurance.
At the end: lease return, PCP and selling
A lease ends with an inspection, usually at your home or workplace, by an inspector working to the wear and tear guide. Be present, walk round the car with them, photograph it before they arrive, and ask for the itemised report before agreeing to anything. Disputes go first to the lessor and then to the BVRLA's conciliation service. Early termination is possible but expensive; most agreements charge around half of the remaining rentals, and a shortfall on a lease you no longer want is one reason people take out GAP cover on a financed car.
A PCP ends differently. The guaranteed minimum future value was set at the start, so depreciation risk sits with the finance company if the car is worth less, and with you as equity if it is worth more. Get the car valued by a dealer and an online buyer before the final payment date; if the valuations beat the GMFV, that difference is yours to use as a deposit on the next car or to take as cash by settling and selling.
If you own the car outright, the same three factors decide the price, and the channel decides how much of it you keep: a private sale gets the most but takes the most time, an online buyer is quick and typically several hundred pounds lower, and a part-exchange is the most convenient and usually the lowest. Whichever you choose, a clean car with a full history, a fresh MOT and a matching set of tyres sells faster and for more, and that is depreciation reduced by the only method that works after the day you bought it: looking after the car.
Frequently asked questions
How much does a new car lose in the first year in the UK?
Typically between 15 and 35 per cent of its list price, depending on the model, with the used market's demand for that car deciding where in the range it falls. The loss slows in later years, with around half the value usually gone by the end of the third year.
Is leasing cheaper than buying if a car depreciates heavily?
Leasing moves the depreciation risk to the funder, which is valuable on a car expected to fall hard, but the funder prices that risk into the rental. Leasing is usually the cheaper route for a driver who wants a new car every two or three years; buying and keeping a car for six years or more is almost always cheaper overall.
What counts as fair wear and tear on a lease car?
Most UK lessors use the BVRLA Fair Wear and Tear Guide. Light scratches that have not broken the paint, small stone chips and normal tyre wear are acceptable; dents, scuffed alloys, chips through to the metal, interior damage and non-matching or illegal tyres are charged for.
Can I reduce my excess mileage charge before the lease ends?
Usually yes. Contact the funder as soon as you know you will exceed the allowance and ask to amend it. The higher monthly rental is normally less than the excess mileage charge at the end, and it removes the risk of a large single bill.
Does a private number plate affect depreciation?
Not the car's value, provided you remove the plate and put the original registration back before the sale or return. Leaving a private plate on a lease car at return can cost you the plate, so transfer it off in good time.