Car Depreciation – What Factors Affect It?

Whether you are planning to buy a new car or sell your existing one, you need to learn about car depreciation. The car’s value starts depreciating the moment it rolls out from the dealership. The car depreciation rate varies between different models and brands. You can use car depreciation calculators to get a fair estimate of your vehicle’s value. 

Read the following sections to learn more about car depreciation.

What is Car Depreciation? 

Car depreciation refers to the rate at which a vehicle loses its value over time. Simply put, it is the difference between the car’s value when it was first purchased and when it is sold. The value keeps decreasing each year, and the depreciation rate depends on multiple factors. These factors include natural wear and tear, accidents, servicing, mileage, etc. 

You cannot avoid depreciation. However, you can avoid mistakes that result in rapid and steep depreciation by understanding the factors affecting it. 

On average, a car’s value reduces by 15-35% within the first year of its purchase. Within 5 years, the depreciation rate rises to 50%. You can use car depreciation calculators to estimate any car’s depreciated value by entering some basic details. 

Different car depreciation formulas are used to estimate the vehicle’s worth when selling. The two main formulae are listed below: 

• Prime Cost Method for calculating Depreciation

Cost of running the car x (Days you have owned the vehicle for / 365) x (100% / Age of the vehicle)

• Diminishing value method for calculating Depreciation

Car’s purchase value x (Days you have owned the vehicle for / 365) x (200% / Age of the vehicle)

Related Article: How to Sell Used Car Online in India

Factors Affecting Car Depreciation Rate

1) Age

New cars hold better value compared to old vehicles. The car’s age is calculated from the day it is sold to the first owner. If your vehicle is older than 5 years, you will face difficulty getting a good value. Someone looking out for a second-hand car purchase must look for cars not older than 3 years. 

2) Model

The car brand and model greatly influence the depreciation value. If the car has a reliable image in the market, it will depreciate slowly. The newer and higher-performing models retain good value over time. Don’t weigh all your decisions merely on price. Focus on the model and brand to ensure the investment pays off well. 

3) General Condition

Cars with well-maintained interiors and exteriors tend to hold up their value. If the condition is poor and the car has been damaged, it will hold little to no return value.

4) Service History

Cars that have been serviced regularly, as recommended by manufacturers, hold better value. Cars with poor conditions with irregular servicing lose their value quickly. Always get service history records while determining whether or not to buy a second-hand car. 

5) Fuel Economy

Cars that offer good better mileage are cost-efficient. Hence, they have better resale value. Luxury cars depreciate faster than normal cars as they offer lower mileage. 

6) Distance Covered

The miles covered by vehicles are also considered to assess their physical health. Cars with fewer covered miles are usually in good condition and require minimum repair and work. On the contrary, cars that have covered more miles have gone through more wear and tear and hold less value in the market. While looking for a second-hand purchase, go for cars that have run only a few miles. 

These are a few factors that determine the car depreciation rate. Weighing these factors, insurers determine the car’s value when selling. 

Car depreciation rates in India

Insurance companies calculate the depreciation rates on vehicles per the guidelines laid by the Insurance Regulatory and Development Authority of India (IRDAI). The car depreciation rate for insurance changes based on the age of the vehicle. 

Also Check: How to transfer Insurance of a Used Car

Conclusion

You cannot avoid depreciation completely. However, you could ensure that the depreciation rate for your car remains as low as possible over the years. You can achieve it by taking good care of your vehicle, getting it regularly serviced from authorized places, and avoiding harsh driving.