Car Depreciation Explained - How to Calculate and Minimise Depreciation

A car can be different things for different people. For some, it can be a possession of sentimental value, whereas for others it can be an extension of one’s personality. However, when things are viewed through a financial lens, a car is an asset for everyone, and a depreciating one at that (in almost all cases). To simplify things, an asset, in financial terms, is anything that holds a certain monetary value. In the cases of land, stocks, gold and other such things, these assets are often termed as appreciating assets as their financial value increases over time. However, in the case of cars, they are mostly depreciating assets as cars lose their value over a period of time. This reduction in the value of a car over a number of years is called depreciation and the rate at which the value of a car reduces every year is referred to as a car’s depreciation rate.

When does your car’s value start depreciating?

This is going to pinch a little, but your car’s value starts depreciating as soon as you drive it off the showroom floor. However, that doesn’t mean you can’t take measures to arrest the rate of decline and we will cover how to do that later in the article. First, let us establish the timeline or the rate at which car depreciation happens.

IRDAI or the Insurance Regulatory and Development Authority of India is the entity that sets the car depreciation rate for insurance purposes in India. Currently, a one year old car depreciates by 15 percent whereas a 5 year old car loses half its original. For a better understanding, take a look at the car depreciation rate slabs in the table below that have been fixed by IRDAI for all insurance companies to follow.

The above given slabs fix a tangible value of how much a a car depreciates over time. They are used to calculate the IDV or the Insured Declared Value of a vehicle. This is essentially the sum that the insurance company will pay you when you claim insurance on your vehicle in case it is stolen or falls under the total loss category after an accident. The IDV fixed by an insurance provider is more or less on the lines of the actual value of a particular car in the used car market. However, there can be a difference in these two values when you take into account the intangible factors behind a car’s depreciation rate. For cars older than 5 years, the IDV is mutually decided between the insurer and the owner of the vehicle.

What factors affect a vehicle’s value over time?

We have already discussed that as the age of a car increases, its value decreases and therefore time is the tangible factor when it comes to car depreciation rate. However, there are a bunch of intangible factors at play too.

Car Brand: Reliability is one of the biggest intangible factors that can slow down the depreciation rate of a car. Car manufacturers such as Honda, Toyota, Maruti Suzuki and even Hyundai are known for their reliability in the Indian market. Therefore their cars suffer from less depreciation as they are known to be more reliable than similarly aged cars from other brands. This is often supplemented by the fact that these cars sometimes have a lower maintenance cost compared to cars from other brands. 

Mileage: Another big factor behind slowing down the depreciation of a car is its odometer reading or mileage. The higher the odometer reading, the lesser a car’s value. This is similar to time. However, the reason it’s intangible is because it is also tied to the reliability of a vehicle. Cars from the aforementioned reliable brands will still hold their value well, despite a higher odometer reading than usual. A good example of this is the Toyota Innova Crysta, a vehicle which holds its value better than others in the used car market.

Number of Owners: A frequent change in the ownership of is also a serious depreciation factor in cars. A car in the used car market that has gone through multiple owners will command a lower value when you compare it against a car which has just entered the used car market for the first time, despite being the same model and having similar number of kilometres on the odometer clock. This happens because cars that have been through multiple owners have a stigma attached to them. Most people will sell a car quickly if they perceive it to be full of problems. An extension of this is the fact that if someone buys a car to sell it in a short span of time, chances are that they did not put in the required amount of effort in its maintenance.

Service History: Speaking of maintenance, a car that has a full-service record and has been worked upon at authorised service centres only will depreciate at a lower rate. A vehicle that is maintained timely and at authorised workshops is perceived to hold higher value than a vehicle which hasn’t. Therefore, a buyer in the used car market will be willing to pay more for such a car. Additionally, cars that have an extended warranty attached to them also fetch a higher value simply because the car manufacturer covers them against any defects for a longer period of time.

Fuel Efficiency: Last, but not the least, fuel efficiency plays a key role when it comes to a car’s depreciation rate. Cars with a higher fuel efficiency depreciate slower. This is because the next owner is assured of a lower running cost. Over the years, Maruti Suzuki has played this card really well in the Indian market. For more than a decade now, the Indian carmaker has had a reputation for manufacturing cars that return exceptional fuel efficiency. Therefore, their cars hold their value really well in the used car market. However, in the recent past, this depreciation factor has lost some of its sheen as Indian car buyers have slowly started migrating towards cars with more performance and features. However, fuel efficiency still remains a strong criterion in the used car market.

Can anything else depreciate the value of my car?

While depreciation is not an exact science, there are some factors other than the ones listed above that might depreciate the value of your car in an unusual manner. For starters, if the vehicle is involved in an accident, it immediately loses value, irrespective of how old it is. It goes without saying that the more severe the incident, the more value a car will lose. 

Another factor that can quickly depreciate the value of a car is when its manufacturer packs up their bags and exits the Indian market. Over time, a few carmakers such as Daewoo, Opel, Chevrolet, Fiat, Mitsubishi, and more recently, Ford have gone down this path, and their cars took a hit in the used car market. This is primarily because spare parts availability for these cars comes into question and it can become harder and harder to maintain them over time.

Last but not the least, a change in government policy on specific types of vehicles can also cause a vehicle to lose value. For example, diesel vehicles used to hold their value really well before the government imposed a ban on diesel cars older than 10 years in the Delhi/NCR region. While the ban is restricted to the capital and its surrounding areas for now, there are fears such policies might be enacted in other regions over time. Therefore, the value of diesel cars has taken a hit, not just in the National Capital Region, but all over the country.

How does the rate of car depreciation affect you?

The depreciation rate for any vehicle will affect you, irrespective of the fact that you are a buyer or a seller. However, in both these scenarios, there are different strategies you can employ to best suit your purpose.

If you are a buyer, the primary thing you need to decide is the purpose behind buying the car. Are you buying a car that you will keep for years and will also work as your primary vehicle? In that case, you should look for a vehicle that hasn’t depreciated all that much. It will require you to spend more than other cars in the market, however, the car will work better and cause fewer problems over its life.When you do decide to sell it, you will still be able to get a good value. On the other hand, if you are looking for short-term vehicle ownership, you can look at cars that are near the end of their life. If you are lucky, you might find a well-maintained car near the end of its life at a bargain price.

There is one more aspect to the buyer's side that some people often miss out on. Depreciation also comes into play when you are filing your income tax. If you have taken a car loan, then, under certain circumstances you can avail some tax benefits. The caveat is that you have to be self-employed and have to use the car for business purposes.

If you are the seller, the strategy is quite simple. Maintaining the general health of your car will go the longest distance in terms of mitigating the effects of depreciation. People are often willing to pay a premium for cars that are known to be driven well and have been maintained in an excellent manner. You should also maintain a proper record of all the work done on the car to further make your case in a negotiation.

How to calculate the rate of depreciation of your car?

As we mentioned before, depreciation is not an exact science. However, there are some methods that can give you a general idea of it. The easiest way to find out how much your car has depreciated in value is by checking out websites that sell used cars. It’s a good way to find out how much people are willing to pay for a car similar to yours. By far, this method will get you closest to the actual number.

Another great way of calculating depreciation is by multiplying the total cost of the vehicle by a percentage number that decreases every subsequent year. This method is quite popular as it takes into account the fact that a new car’s value depreciates very quickly and then over time its depreciation slows down. This is because mechanical wear and tear is nil at the time of buying a car from the showroom and then it increases over time. Thus, a new car has a lot more value to it in terms of material than an older car.

Can the value of your car appreciate?

In the regular used car market, it has been known to happen. During the last half a decade, new car prices went up at a spirited pace. This led to the price of cars in the used car market appreciating as well. However, this is something you can’t plan for.

There is another way in which car prices can appreciate, but it’s applicable to only certain types of cars. Cars that are produced in limited numbers and in high demand around the world can witness their prices appreciate. The rarer the car, the more potential to appreciate. However, such success is only enjoyed by marquee names such as Ferrari, Lamborghini, Aston Martin and even Mercedes-Benz and BMW. 

Classic cars also fall under a similar umbrella. Well-maintained classic cars fetch a lot of money at auctions. In India, cars manufactured before the year 2000, are legally considered as a classic car.If it was a popular model at its time and holds significance in automobile history or car culture, chances are, you could sell it in a couple of decades at quite some price. Ultimately, car prices can appreciate in only the rarest of cases, and most cars sold in showrooms today only see their value depreciate.

Conclusion

Car depreciation rates can seem like a confusing topic at first, but if you look past the technical jargon and the numbers involved, it ultimately boils down to counting down the years. The actual rate of depreciation also depends upon public perception of certain brands and how well a particular car is maintained. Ultimately, when dealing with the depreciating value of a car, one has to strategise by narrowing down the purpose of buying or selling a car. 

For example, if you want to keep a vehicle for a fair number of years and retain maximum value, then you should start with a new car and maintain it well. Thus, when you go to sell it, you will have preserved maximum value by not only offering a better condition car, but also by being the first owner. On the other hand, if you want a short-term car with very little depreciation, then you should look for a used car around the 3 or 4-year mark, which has already lost a good chunk of its value. As the rate of depreciation slows down over time, you will lose less money over the next year or two. When you do sell it, you will be able to recuperate a better percentage of the money than what you would manage with a new car. 

It won’t be the same for everyone, but by knowing the facts and perceptions that surround the rate of car depreciation, you will now be able to make a better decision for yourself.

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