How To Understand Car Depreciation

How To Understand Car Depreciation

Nothing lasts forever, and your car is no exception. Although over time your vehicle will not work as well as it did brand new, unfortunately on top of that it will lose much of its value as well. While this is just a part of the business of cars there is a need to understand how cars lose their value. 

What Is Depreciation?

Depreciation refers to an accounting principle that measures and values the cost/worth of a tangible asset over its lifetime. Basically it means how much an asset’s value has been used, or how much is left. Depreciation is the opposite of Appreciation, which is when an asset gains value over time. A great example of this is houses. Most of the time when all factors are going good a house will be worth more over time rather than less. Cars on the other hand will decrease and depreciate over time. There are a few exceptions like ultra-rare sports and luxury cars, but the average sedan or minivan driven off a lot will be worth less in 10 years not more. 

Cars depreciate fast. As soon as a car is driven off the lot it begins to lose value. It is estimated that a car can lose 20% or more of its original value within its first year. By the end of a car’s 5th year the depreciation is up to 60%. 

Depreciation Causes And Calculations

There is no set percentage or number, and calculation of depreciation that applies to all cars the same because there are so many different types of cars and factors that influence their value. The factors that affect the depreciation of a car include: 

  • Make: Not all vehicle models are the same in value. Trucks, SUV’s, and sports cars depreciate over time the least. Luxury sedans depreciate the most after five years. 
  • Age: New car models are released every year. As a car gets older it loses its luster and value as it is no longer new and its technology becomes obsolete. 
  • Mileage: The more miles a car has the more it has been used. Used cars have wear and tear on them and are worth less because of it. 
  • Condition: Even if your car is less than five years old if it has not been taken care of properly, the newness won’t matter. Even if a car has been in an accident and repaired its value is still affected due to it being in an accident. 
  • Ownership History: An older car that has had one owner with a history of care will be worth more than a newer car with various owners and poor care history. 
  • Reputation: Certain car brands’ value is better and worth more than others. 

How Car Depreciation Matters

The biggest reason that car depreciation matters is because it affects the resale value of a car. Cars that have been taken care of and are in good condition can be sold and traded in for large values. When purchasing a new car you will want to do proper research on how much the vehicle will be worth in the future. 

The second reason car depreciation matters is because if your car depreciates too quickly you might owe more on the car than it is worth. This is called being “underwater” and is when you owe more than a car is worth. This is negative equity and needs to be avoided at all costs. 

How To Understand And Reduce Car Depreciation

The best way to manage and understand your car’s depreciation is to do detailed research. You can ask your car dealer directly, look online, and more in order to find out how much your vehicle is worth currently and how much it will be worth in the future. 

Additionally For Those Looking To Reduce Car Depreciation Here Are Some Methods Below:

  • Get Routine Maintenance: Your car will stay in great shape if you look after it regularly. Regular checkups and maintenance will help your car retain value. Also you will want to keep your maintenance history to be able to prove you have taken care of your car.
  • Clean the Inside And Outside: Make sure to clean the interior and wash the outside regularly. Not just for the buildup of junk but to fight against outside rust that can bring damage. Using a garage to store your vehicle is optimal if you have this option. 
  • Drive Less: The less miles your car has the less wear and tear. Try to drive less than 10,000 miles a year to help your car retain value and keep maintenance costs low. 

Extended Warranties Can Help Against Deprecation

While your car will lose value over time, with proper maintenance and care it can still retain some value to you in its daily use, or through selling and trading it in. One way to keep value on your car is through an extended warranty. 

An extended warranty will offer protection for a vehicle after its manufacturing warranty has expired. Over time as your car gets more wear and tear and you will need to replace and fix parts, an extended warranty will cover these costs allowing your car to keep running and hold value as well.

How To Understand Car Depreciation

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