Car Depreciation Explained - How to Calculate and Minimise Depreciation

In case you are planning to buy a car, be it a used or a new one, you should know about something called car depreciation. This is important because the value of the car starts dropping as soon as you purchase it. This phenomenon is common across all cars sold in the world. However, being a car owner/buyer, you should be aware of all the factors that affect car depreciation. This will help in preparation for your car purchase or even the sale of your vehicle. 

What is Car Depreciation?

Simply speaking, Car depreciation is the difference between the sum you paid to buy a car and what you get during its sale. This is one of the biggest costs one bears as a vehicle owner along with the fuel and maintenance costs. Also, brand new cars lose value a lot quicker than used cars. 

In fact, a new car loses up to 60 percent of its ex-showroom value in the first three years of the ownership. It is important to learn about car depreciation before you buy a vehicle. We say so because finally, when you sell off the car, the depreciated value is what you get. 

Hence, it gets really important to know about various factors at work in car depreciation.

Factors Affecting Depreciation of a Car

Having explained about car depreciation above, let’s now take a look at the factors that are instrumental behind the depreciating value of your car :

• Odometer reading - This is the number of kilometres or miles that your car has clocked so far. Higher the reading, lesser will be its value. 
  
  
• Service history - Cars that have been serviced at authorised workshops with valid records are likely to depreciate lesser. This is because the service history works as a proof of good maintenance.
   
  
• Reliability - As it goes without saying, cars that tend to be reliable, lose their value less.
    
  
• Length of warranty - While most cars have a standard warranty of 3 years, some carmakers offer extended warranty of up to 7 years. Cars covered under enhanced warranty have a higher value as there’s a trust factor involved here.
   
• Fuel economy - Cars having a higher fuel efficiency depreciate slowly. This is because used car buyers prefer cars with a higher fuel efficiency.
   
• Number of owners - Cars that have had more than one owner in the past fetch a lesser value. Hence, if you want to sell used cars which are currently in the hands of their third or fourth owner, it will get you relatively lower value.
  
  
• Makes and models - Some models are discontinued and replaced with new versions while some carmakers have ceased operations in the market. In such cases, the seller gets a lower value due to a higher degree of depreciation. 

How does car depreciation affect buyers and sellers?

By now, you must be fully aware of the factors that accentuate or reduce car depreciation. So, in short, it has a direct effect on both buyers as well as sellers involved in the transaction of used vehicles. 

For Buyers: As a buyer, you’ll desire to purchase the vehicle at the lowest possible price. However, it’s often sensible to pick a model that has the least depreciation. While it would mean paying more for it, you’ll recover the premium you would pay at the time of selling the vehicle. 

Also, the fact that the vehicle you’re buying hasn’t depreciated much clearly shows that it has high reliability, has been maintained well, isn’t obsolete and even has a lower cost of ownership. Hence, you’re recommended to plan the purchase as per your exact requirements and refrain from simply picking up a used car available at the cheapest price.. 

For Sellers: If you sell used cars, you’ll, of course, intend to get benefitted from the least depreciation valued cars. Hence, vehicles that keep their value intact will offer better returns at the time of sale. This is an important aspect that every individual should keep in mind when buying a new vehicle. 

This might mean paying a bit more initially but it would be certainly recovered at the time of selling the used car. Plus, you might even benefit from higher reliability, lesser maintenance, higher fuel efficiency, and more. 

Car Depreciation Curve in India

Car depreciation depends on a number of factors, including exact condition of the vehicle and availability of the model in the market. However, insurance companies have a predefined algorithm to calculate depreciation. They use it to gauge the IDV of the vehicle. The depreciated value is calculated on the basis of depreciation rates laid down by the Insurance Regulatory and Development Authority of India (IRDAI). These rates are decided on the basis of age of the vehicle. The below table tells you about the official car depreciation curve in India - .

Age of Car	Rate of Depreciation
0-6 months	5%
6 months – 1 year	15%
1 year – 2 years	20%
2-3 years	30%
3-4 years	40%
4-5 years	50%
Above 5 years (for obsolete models)	Mutually decided between the insurer and vehicle owner

How to Calculate Depreciation?

There are different ways to calculate the rate of depreciation of a car. The easiest of this is on the basis of the age. For example, if you buy a car that is 1 year old and sell it when it is 4 years old, simply learn about what amount 4-year old vehicles of the same type are fetching on the internet. 

A better way to calculate the depreciation is to use the straight line depreciation method. This method decides the rate of depreciation by dividing the cost of the vehicle by the number of years it is likely to last.  

Another way to calculate depreciation in car value is to use the declining balance depreciation method. This method of calculating depreciation multiplies the cost of the car by a percentage that decreases each passing year. This percentage depends on how long the car tends to last. 

Last but not the least, another way to get the depreciation value of a car is to use the sum-of-the-years' digits method. This method calculates depreciation by adding up all of the digits in the years that the car could last and divide the number by 9. 

Why is depreciation an important factor to consider?

When buying a car, one should be aware of the depreciation factor as it would help him/her plan his future goals accordingly. Most people sell used cars to upgrade to a better model. In such a scenario, one expects to get the maximum possible value of the vehicle. 

While a new car loses value as soon as you buy it, it is bound to depreciate till the point you sell it off. Hence, it gets important to know about the depreciation a model would incur before you buy it.  

On the other hand, used car buyers should tend to get attracted to cars that are least priced. However, buying ones that have depreciated the most might not be a good idea. Generally, cars that depreciate more are the ones that are less reliable, are obsolete, have higher maintenance and are out of warranty.

 Hence, it would be wise to invest in a car that has retained its value better. This would not only mean a greater peace of mind but would even help you with a higher resale price when you finally sell the vehicle off. 

Ways to Minimise Car Depreciation?

When you buy or sell used cars, it’s important to know about the phenomenon of car depreciation. Depreciation is the decrease in the value of the car over the period of ownership. So, your asset starts losing its value the moment you become its owner. However, the rate of depreciation depends on various factors discussed earlier in this post.

So, there are a few sure shot ways to minimise the depreciation. One of these is to maintain the car properly. In fact, it’s even important to have all the service records of the company authorised dealerships handy. Also, if looking for lower depreciation, avoid using your car too much.

Higher the kms run on the odometer reading, lower will be the car’s value. Yet another way is to avoid buying a car that could soon get obsolete. Plus, buying cars from reputed carmakers, like Maruti Suzuki, Toyota and Hyundai, will ensure slightly lesser depreciation. Through these ways, you can benefit from lower depreciation value when you sell used cars.  

Conclusion

By now, you must have understood that car depreciation is something that has affected each and every car created till date. It’s an aspect that every car buyer/owner/seller has come to terms with. However, there are some cars that depreciate faster than others. Also, there are many conditions that make the vehicle lose its value faster.

These are important factors that you must consider when you purchase or sell used cars. To make things easier for you, we’ve discussed some ways through which you can benefit from lower depreciation. We’re sure our little guide here will help you make an informed new as well as used car buying decision.  

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