The typical American spends nearly an hour per day driving. This means almost 13 full days on the road every year!! Well, that’s a not-so-shocking fact. But, unfortunately, the longer you are on the road, the harder the value of your car drops. It’s called car depreciation. Read to know more.
What is car depreciation?
Car depreciation is the loss in value from the time of purchase to the time of sale. Unlike houses, which tend to increase in value over time, automobiles typically depreciate. This is because your vehicle loses value as time passes due to normal wear and tear.
New cars typically lose 20% or more of their value in the first year and another 30% to 40% in the fifth. These numbers fluctuate widely depending on factors such as model, make, maintenance, and year. Except for classic and collectible vehicles, whose value may actually increase over time, automobiles depreciate in value over time.
Used cars are more cost-effective than brand-new ones because of depreciation. In the case of a used car, its prices reflect the depreciation that has happened in the time since the vehicle was first driven off the lot. Used cars lose value over time, but typically at a slower rate than brand-new ones. Therefore, car lease payments reflect the vehicle’s expected depreciation over the lease’s duration.
If you are met with an accident, and your insurance company compensates you based on the car’s current market value, the depreciation in value is relevant. And if you have a loan balance, this may not be enough to pay it off.
If you decide to sell or trade in your car, keep in mind that its depreciation could leave you will fund lesser than what’s necessary to cover any outstanding loan balance. The cost of depreciation is included in the broader category of operating expenses, including insurance, upkeep and repair, registration, and gasoline.
How to calculate car depreciation
Car depreciation can be calculated using the following formula:
D = P – A
Where A = P * (1 – R / 100)n
A = Value of the car after a period or n number of years
P = Purchase value of a car
R = Rate of depreciation
N = Number of years after the purchase of the car
D = Depreciation
What influences car depreciation?
Several factors influence how quickly a vehicle loses value. Knowing the factors that contribute to a vehicle’s depreciation over time can help you make more informed decisions before and throughout your ownership. Here are some:
Your car type
Pickups and SUVs are in high demand, even as used vehicles, so their value tends to hold up better than that of other vehicle types; in contrast, luxury sedans tend to lose value more quickly. Cars in high demand, such as the Chevrolet Corvette and the Ford Mustang, tend to retain their value for longer.
Your car make/model
When it comes to depreciation, some brands, like Toyota, fare better than others. For example, both the Jeep Wrangler and the Jeep Wrangler Unlimited have low rates of depreciation. But the depreciation rate for a few BMW models is significantly higher than the average of 40% over five years.
Your car’s age and mileage
Vehicles lose value as they get older and enter the secondhand market. When a vehicle has gone a lot of miles, its resale value drops because of the high cost of maintenance and possible repairs.
Your car’s condition
The value of a car that has been driven regularly and shows only moderate signs of wear and tear is likely to be higher than that of a vehicle that has been badly treated or neglected.
Your car’s brand reputation
In the case of automobiles, certain models and makes are notorious for having a high depreciation rate due to their high maintenance and repair costs.
How much do cars depreciate?
The value of a car typically decreases rapidly in the first year and continues to do so for another five years after purchase. In the first year alone, a car can lose as much as 20% of its value, and in the first five years, that number rises to around 40%. After the first year, its value declines by about 15% annually.
Top 5 lowest vehicle depreciation rates
|Rank||Model||Average five-year vehicle depreciation rate|
|2||Jeep Wrangler Unlimited||10.5%|
Top 5 highest vehicle depreciation rates
|Rank||Model||Average five-year vehicle depreciation rate|
|3||BMW 7 Series||61.5%|
Tips to slow down car depreciation
Car depreciation is inevitable, unfortunately. However, there are steps you can take to mitigate its speed.
Be conscious of your car’s mileage.
Take steps to reduce your gas consumption. Your vehicle may retain more of its value if you keep your annual mileage below the national average of about 14,000.
Have a maintenance schedule
Your car should be maintained regularly. It is important to change the fluid and inspect the brakes and other typical tasks as per the manufacturer’s suggested schedule. In addition, you should keep documents showing regular maintenance and recall fixes so that you can show potential buyers that your car has been well cared for.
Get yourself a GAP policy
In the event of an accident that results in a total loss of the vehicle, GAP insurance will reimburse the borrower for the difference between the loan balance and the car’s value. It will shield you from financial ruin if you lose value in your vehicle or fail to keep up with payments. Car leases often necessitate GAP coverage.
Keep your car clean and sanitized
Wash and wax the exterior frequently, and vacuum and wipe down the inside as well. Restore the paint and metal if it has been damaged or rust has set in.
Consider a valued brand name
Always go with a trusted brand name. Choose vehicles with low depreciation rates after doing some research.
Choose your car’s color carefully
Your car’s resale value may suffer if you paint it in an unusual or unattractive color. If you want your car’s value to remain stable, paint it a classic neutral color like black, white, or silver.
Cars drop in value in relation to time
While there are a number of factors that affect car depreciation. New cars lose value at a much faster rate than used cars. Is it significantly quicker, and by how much? Let’s see.
One minute: If you drive off in a brand-new car, you immediately lose 9-11% of its value. Put another way, if you buy a brand-new $50,000 car and drive back, $5000 is already gone off the window.
One year: The depreciation of a brand-new vehicle is highest during the first year of ownership. Typically, a vehicle loses 20% of its value in the first year after purchase.
First five years: Depreciation on a brand-new vehicle averages 15–25% per year for the first five years after purchase, after which it levels off. This means that after five years, the value of a brand-new car has decreased by roughly 60%.
|Initial Car Value||$30,000|
How to use depreciation to your advantage
It’s almost a given that car values will drop over time. That is to say, despite the current trend of skyrocketing used-car prices, the value of your vehicle will inevitably decline over time. However, vehicle depreciation can be used to one’s advantage if one knows how to maximize the benefits they provide.
If your car is still in good shape after a long period of ownership, you may benefit from holding on to it for longer than usual. However, once the odometer hits 100,000 miles, the depreciation rate typically levels off. It’s true that there are some outliers, such as higher trade-in values for highly regarded and popular vehicles like certain pickup trucks.
Automobile depreciation can be used to the advantage of savvy shoppers looking for a bargain. Because depreciation lowers the value of a car in any condition, used cars are significantly cheaper than brand-new ones. There are many one-year-old automobiles on the market that are virtually indistinguishable from brand-new models; however, you can buy one for around 80% of the MSRP.
If you’re looking to avoid car depreciation and take advantage of the remaining factory warranty, buying a used vehicle from the current or previous model year is the way to go. Consider a certified pre-owned vehicle from a reputable manufacturer. Vehicles labeled Certified Pre-Owned (CPO) have passed a rigorous inspection and met other criteria.
Car depreciation hacks
Automobile owners would do well to familiarize themselves with the concept of depreciation to prepare themselves for the inevitable loss of value that occurs when selling or trading a vehicle. If you’re selling a car, you might want to think about how to slow its depreciation and keep your profit margins higher. Here are some:
Maintain your car
Don’t neglect your car’s maintenance. Keeping up with the vehicle’s maintenance records is a reflection of responsible ownership and adds to the vehicle’s resale value.
Sell the car yourself
You should try to sell the car on your own. Trading in your vehicle at the dealership can save you time and effort. However, if you sell privately, you can set the price at whatever you like while still pocketing the fees that a dealer would normally add to the price of a used vehicle.
Don’t customize your car
Do not alter your car in any way. Of course, you can express your individuality through aftermarket modifications, but you’ll likely turn away a sizable portion of the market in the process. So instead, keep your car appealing to a wide range of potential used buyers by avoiding expensive and flashy upgrades.
Look for tax breaks
Search for any available tax reductions. Consult your tax professional to see if you qualify to deduct any of the depreciation of your vehicle from your business or side income.
Why car depreciation is a necessary evil?
The bright side of depreciation is that it is irrelevant until you sell the vehicle. However, there are a few situations where the car’s value becomes relevant: when it’s time to sell, when it’s used as a down payment on another vehicle, and when the insurance company declares the car “totaled” due to damage caused by an accident.
Until then, you probably shouldn’t worry too much about the difference between the current and original prices of your car. The value of the vehicle will continue to fall until it can no longer be driven. In addition, the junkyard will pay you for your non-running vehicle.
The mileage and age of a used car are important factors to think about before making a purchase. The extent to which the owner cared for the vehicle should be considered even more critically. It’s possible that a 5-year-old model with 50,000 miles hasn’t been given as much care as a 10-year-old vehicle with 100,000 miles.
Depreciation is inevitable, but you can protect your vehicle investment by treating it well. Remember that as the time approaches, part ways with your vehicle.
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