What Is Car Depreciation?
When buying a car, you need to consider and calculate the rate of depreciation that the car is going to go through. Car depreciation is the amount a car’s value decreases over time. There are several reasons you should understand depreciation and how much the car you’re buying is bound to depreciate.
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-The rate of depreciation in new and used cars
-Factors consider with depreciation
-How to calculate depreciation
-Using depreciation to your advantage
Planning For Depreciation
First of all, knowing how much a car is going to depreciate will help you decide on how and when you’re going to sell the vehicle. If you're planning on buying a new car for $30,000 and sell it after 5 years, that car may only be worth $15,000 by the time you’re ready to sell. This means that you’d have spent $15,000 on the car to own it for five years. Alternatively, if you decided to buy a three-year-old used car for $30,000 after it had already gone through much of its depreciation, the vehicle may sell five years from then for $20,000, only costing you $10,000 to own over five years.
The Rate of Depreciation in New Cars
New cars depreciate much more than used cars, as all cars depreciate most in their first year being on the road. Most cars depreciate by 10% the moment they’re driven off the dealership lot, followed by an additional 10-20% after one year. After the first year, cars typically depreciate by 15-25% per year, making the value of the car depreciate by upwards of 60% after five years. This can be extremely troubling for people who opt for long-term loans, causing them to owe more on their loan than the car is worth.
The Rate of Depreciation in Used Cars
Because of the rate of depreciation in new cars that we discussed in the above paragraph, deciding to buy a car that’s only one year old can save you upwards of 30%. If you decide to buy a car that’s two or three years old, you’re going to save even more due to the further depreciation of that vehicle. Not only is this great for you as a buyer, but it works out better for you if you decide to sell the vehicle, as the vehicle will retain more of its value.
The Factors Considered with Depreciation
1. Mileage
While this one is fairly well known and self-explanatory, the amount of mileage you have on the vehicle directly impacts the value of that vehicle. The more mileage, the more depreciation as most vehicles don’t see the road past 400,000 kilometres. So if you and Jim next door both have the exact same Honda Civic except he drives his 10km per day and you drive yours 50km per day, your Civic will undoubtedly depreciate faster.
2. The Make and Model
Certain car brands and models tend to hold their value more than others. A study conducted by iSeeCars.com found that electrical vehicles depreciate much faster than gas-powered vehicles, and certain trucks, SUV’s and sports cars depreciated slower over a five-year period. Overall, Toyota and Jeep have the lowest rates of depreciation among all car brands while BMW has the highest rate of depreciation.
3. Newer Models With Significant Upgrades
When car manufacturers release a new model of vehicle, if the model has significant upgrades/improvements, the older versions of that same model will often depreciate. This can also work the other way though, so when a model is discontinued, the older models won’t depreciate as fast.
4. Condition
This factor should come as no surprise as the better condition the vehicle is in, the more it will hold its value. If your vehicle has a cracked windshield and dents along the driver’s side, this will cause a loss of value to the car.
5. Customizations
Even though you may think at the time painting your car neon green and adding a high spoiler seems cool at the moment, this usually causes significant depreciation. No matter how cool you think the vehicle looks, generally, the more you customize it, the fewer people may be willing to buy it.
How to Calculate Depreciation
As discussed earlier in the article, the most significant amount of depreciation occurs in the car’s first year of being on the road being about 20-30% depreciation. After the first year, the car depreciates at a fairly steady rate of about 17.5% on average. In order to give an example, we’re going to use these numbers to demonstrate how to calculate the rate of depreciation.
If you want to see how much a new car will depreciate, you can simply use this formula:
Value after 1 year: Price of the new vehicle x 0.75
Value after 2nd year: Value of the vehicle after the second-year x 0.825
Value after 3rd year: Value of the vehicle after the third year x 0.825
Value after 4th year: Value of the vehicle after the fourth year x 0.825
Value after 5th year: Value of the vehicle after the fifth year x 0.825
Now that you have the formula, let’s say for example that you’re trying to calculate the depreciation of a vehicle with an MSRP of $32,099.
Value after 1 year: $32,099 x 0.75 = $24,074
Value after 2nd year: $24,074 x 0.825 = $19,861
Value after 3rd year: $19,861 x 0.825 = $16,385
Value after 4th year: $16,385 x 0.825 = $13,518
Value after 5th year: $13,518 x 0.825 = $11,152
So as you can see, after five years, a new car priced at $32,099 is only valued at $11,152. Essentially costing you $20,947 for ownership alone, without accounting for fuel, insurance, registration and any other maintenance the vehicle may require throughout the five-year period.
3 Least Depreciating Vehicles of 2020 (According to iSeeCars.com)
1. Jeep Wrangler Unlimited
2. Toyota Tacoma
3. Jeep Wrangler
3 Vehicles That Depreciate the Most of 2020 (According to iSeeCars.com)
1. BMW 7 Series
2. BMW 5 Series
3. Nissan Leaf
How Does Car Value Affect Insurance Rates?
The value of your vehicle affects your insurance premium in four ways:
1. Value of the car: The more valuable your car is, the more it’s going to cost to insure it. If you have an expensive car that needs repairs, the repairs are going to cost more than if you have a cheaper car that needs repairs.
2. Coverage maximums: If the car isn’t worth a ton of money, high coverage maximums may not be necessary.
3. Types of coverage: If you have an older car that isn’t worth a lot of money, you can consider dropping collision and comprehensive coverage.
4. Safety: Older vehicles with low safety ratings that don’t have the latest safety features typically won’t benefit from any potential safety device discounts.
Using Depreciation To Your Advantage When Buying
While depreciation is the unfortunate reality of being a car owner, if you follow these tips, it can help you as a buyer to use depreciation to your advantage.
Colour of the car counts: As we discussed earlier, the colour of a car can affect the rate at which a car depreciates. Typically, grey, silver, black and white vehicles depreciate at the slowest rate so do your best to buy a car within one of those four colour palettes.
Look at market trends: For whatever reason, some vehicles have lower resale values than other cars so it’s important to consider this when buying.
Shop for a car with minimal wear: When you’re looking to buy a car, keep your eye out for a car that doesn’t look like it’s been beaten up by the previous owner/owners. Ideally, you find a car that just finished a three-year lease term, because leases typically have low mileage limits, so it’s likely the vehicle should still be in good shape.
Drive it until it’s dead: If you don’t want to have to worry about the rate of depreciation, whether you buy a new or used car, drive it until it won’t drive anymore. If you’re not worried about resale value, why would you be worried about the car’s value?
How To Keep Your Car Value High
If you plan on reselling every car you buy, you should follow these four tips to keep your car’s value as high as possible.
1. Keep scent-free: If you smoke in your car regularly, no matter how many times you spray Febreze the vehicle will always have a lingering cigarette smell. Having your car smell like cigarettes or any other unpleasant smells will decrease its value.
2. Keep it clean and without stains: While we all have times when we’re forced to eat in our car, make sure you’re not a messy eater and are bound to leave stains. Any stains or spills in the interior of the car will decrease the value.
3. Keep the miles low: This can be a tough one depending on your lifestyle but if you can manage to keep your mileage down you should. The more kilometres you’ve put on the car, the lower the car will be valued.
4. Fix any problems: If your car has been making funny noises for the past two weeks, take it to a mechanic to get it checked out. It’s important you keep your car in good working condition if you don’t want to see it loses its value.
5. Don’t go crazy with customizations: We’ve heard the rumours too, if you add a spoiler and paint your car neon pink your car will drive 20% faster. Although speed is great, this will likely result in fewer people being willing to buy the car from you.
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