What Affects Car Depreciation?
June 21, 2023If you have ever tried buying or selling a car, then “car depreciation” should not be a new phrase for you. They should also be familiar with the expression that “the minute you drive a new car off the lot, it drops in value”.
Car depreciation is the rate at which a vehicle loses its value over time due to several factors like mileage and age. It is quite a serious issue in the car business because a new car loses almost 20% of its value within the first year.
But after the first year, the value levels out. Be that as it may, after 5 years an owner should be looking at an average loss in value of about 60% of the purchase price which is a big deal.
But car depreciation is not as straightforward as you might think because it sometimes doesn’t follow general depreciation rules. The metrics mentioned above are just average rates and may not be applicable to all vehicles.
There are actually numerous factors that decide your car’s rate of depreciation. Each factor plays a significant role in determining what your car will be valued for, the next year.
Let’s take a look at the main factors that influence car depreciation and see if there’s something you can do to stabilize your car’s worth over time.
Key factors that affect car depreciation
Odometer Reading
Although it might not be possible to keep your mileage down, it’s still worth understanding how higher mileage can affect your car’s rate of depreciation. The average annual mileage for a car is approximately 15,000 km(Australia).
Higher mileage generally means the vehicle has worn out or exhausted parts. If you claim your car to be 5 years old but the odometer reads 100,000 km then no buyer will be willing to pay a huge sum.
It’s also worth noting that “high mileage” is a subjective concept. Since high-performance sports cars are mostly not driven every day, their annual mileage can be different.
Reliability
Some vehicles are unquestionably more reliable than others and this can be shown by numerous customer satisfaction surveys. Any buyer will, for sure, inspect the market before buying a vehicle.
They will mostly be curious about the brand’s reputation for creating reliable parts. A car’s value is going to take a serious toll if the company manufactures unreliable parts.
Number of owners
The basic rule when it comes to maintaining a vehicle’s worth is “the lesser owners, the better.” People make a straightforward assumption that the more the number of owners, the higher is the possibility of the car being used roughly.
This might be a rough assumption but as they say, “a customer is always right”. However, if the car’s year of ownership under the same owner is around 8-10 years then the value is unlikely to depreciate by a big margin.
Service History
It’s beneficial to have a full-service history. If you have the receipts to show the vehicle has been serviced in accordance with the manufacturer’s recommendations, it will be more desirable and you will get more value.
It is also important to have the car’s service book correctly stamped. A properly updated service book allows the buyer to know about the installation and repair of all genuine parts while servicing. This helps them value your car accordingly.
Desirability
Nowadays vehicle manufacturers prefer to add small changes (face-lift) every year, rather than make a few big ones. This way the newer models of a specific vehicle are made more desirable.
This way, your old car is less desirable and unappealing to the buyers which ultimately brings its value down.
Fuel economy
Diesel cars are much more fuel-efficient than petrol. A petrol car’s efficiency also depreciates significantly over time. Since the more km per liter the better, diesel cars hold their value slightly better than petrol cars.
Over time your car’s fuel efficiency is bound to go down, and so is its value. Also, non fuel-efficient cars means the owner has to pay more road tax, which creates a negative impression for buyers.
Location
Like in real estate, a car’s depreciation value is all about location. Your location determines the availability of spare parts for a specific vehicle. The vehicle can hold its value stably until the spare parts are easily found.
Also, a brand’s reputation is not consistent around the globe. A brand’s after-sales support and the price and availability of spare parts vary according to country. This is why in some countries a car’s value depreciates more quickly than in others.
General condition
The overall condition is obviously going to affect your car’s depreciation value as it is the most looked upon factor while buying a car. An old vehicle with bodywork issues or a shoddy interior can bring the price down significantly.
Always keep the engine, tires, and other vital parts in top-notch condition. If a vehicle has just been through a terrible accident and has been damaged or even totaled, the owner should expect a heavy downfall in price.
Luxury cars are rapid depreciators
Luxury cars experience the most depreciation in all of the automobile sector. Since almost no one tends to buy a used luxury car, you are stuck with it until the end.
Also, they cost more to run and their parts/maintenance are usually more expensive. But this again depends on your location because in some countries people are willing to pay millions for underproduced luxury cars.
How to minimize car depreciation?
You should take certain steps to escape the financial shock of a large depreciation. A few simple pointers would be:
- Keep an eye on your vehicle’s mileage. It might not be possible to keep your mileage down, but it’s still worth understanding how higher mileage can affect your car’s rate of depreciation.
- Keep your vehicle serviced regularly so that it is always buyer-ready. Make sure that your car won’t keep you stranded in the middle of nowhere. Also, pay attention to the check engine light.
- Repair any interior or exterior damage as soon as possible. If you keep your car damaged or unrepaired for too long, its value is surely going down.
- Keep your records, receipts, and documents up-to-date. Also, clear all the taxes on time.
- Stop adding flashy features like spoilers, flared wheel arches, or big wheels. When it comes to sale, these can end up costing you more money than they bring in.
Bottom Line:
So purchasing a vehicle considering the current or the past market can be a bit challenging. The recalls redesigns, and changes in consumer taste and fuel price can scramble even the most planned purchasing decision.
The best thing to do is to purchase a vehicle that best suits your interest and that fulfil your needs. Don’t ever purchase a vehicle with the intentions of being safe from the effects of depreciation because it is the undeniable truth and no one can escape it.