This refers to the reduction in the value of your car as it gets older. It is affected by mileage, and wear and tear and is effectively the difference between the price you paid for the vehicle when you bought it and what you can sell it for at a later date. Vehicles that are said to retain their value and have a high second-hand value have a lower depreciation than those that have a poor second-hand value relative to their purchase price.
The value of your car after depreciation is sometimes referred to as the Residual Value.
Cars with low depreciation will tend to have higher Residual Values and therefore lower Monthly Payments in PCP finance plans compared to vehicles with high depreciation.