How Does Car Depreciation Work?

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“All those cars were once just a dream in somebody’s head,” quotes Peter Gabriel. Buying the car of your dreams? Have you considered factors like the depreciating value of your car and how the value of your car will go down each year from the moment you buy it? In this article, we will help you in understanding how car depreciation works for different types of cars. Car depreciation does not work in favor of car owners but we will share with you some tips to maintain the value of your car and look out for the best opportunities to use vehicle depreciation in Canada to your advantage. 

What Is Car Depreciation?

Car depreciation is the value of a car that decreases over a period of time. Various factors like the average mile per year on a vehicle, the internal and external aspects of the car, the specifications and features, and so on determine the rate of depreciation. On average, the value of a car decreases by 15-25% every year. Cars start losing their value from the moment they leave the lot and the maximum value is lost within the first year of buying a new car. The depreciating rates affect the sale or trade-in value of your car. In the falling sections, we will look at how car depreciation works and how you can make the most of this feature if you are planning to buy an old car. 

Understanding How Car Depreciation Works

The rate of depreciation in a car depends on whether the car was new, used, or leased. The average depreciation rate of a car ranges between 15% to 25%. Let us take a look at how different cars depreciate over a period of time. 

  • New Car Depreciation

The rate of depreciation is the highest in a new car. By the end of the first year of its purchase, a new car loses about 25% of its value. 

  • Used Car Depreciation

Buying a used vehicle will help you pay around 20-30% less than the actual price of the car since the car has lost its major value in the first year. If you go for an older car you can save even more and when selling or trading in this used vehicle it will be able to retain a bigger portion of its value. 

  • Leased Car Depreciation

Another option for people who need a car is to lease a car instead of buying a new or a used car. The lease price of a car will include not only the cost of depreciation but also the tax and interest. At the end of the lease term, you do not have to worry about selling the car profitably. All you need to do is hand over the keys or buy the car at the set buyout price. You might be up for a profit if the car’s resale value is higher than the buyout price. 

How Is Car Depreciation Calculated?

For calculating the vehicle depreciation rate, Canadian dealerships consider a 25% decrease in the value of the car in the first year after its purchase and a 17.5% depreciation every year thereafter. To calculate the value of your car at the end of the first year of its purchase you will have to multiply the total price by 0.75 and for every year thereafter, you need to multiply the depreciated value by 0.825. This will give you an idea of what the price of your car will be in the market in that particular year. 

What Factors Contribute To A Different Depreciation In A Car?

What influences the rate of depreciation of a car? Why are some cars valued higher than other cars even when both cars are used? There are certain factors that lead to the value of a car reducing every year. These could be interior or exterior aspects of the car itself, the market value of the car, or the prices of maintaining and running the car. Let us take a look at the factors that contribute to the depreciation of a car after it is purchased. 

  • Age
  • Mileage
  • Brand
  • Paint Colour
  • Gas Prices
  • Accident History
  • Running Costs
  • Configuration
  • Demand and Supply
  • Taxes and Subsidies
  • Warranty
  • New Models

How To Keep The Value Of Your Car High?

Considering vehicle depreciation rates, you must be wondering whether or not there is a way to keep the value of your car high. Following these steps will help you maintain the value of your car and keep the resale price higher than the average price. 

  • A well-maintained car is one of the basic requirements of people who buy a used car. Follow the car maintenance schedule as set by your car manufacturer, keep a record of each service and keep your receipts safe. 
  • Keep your car clean, stain-free, and scent-free. Any visible spots and stains or lingering bad smells can lead to the value of your car decreasing.
  • Go easy on the miles. The value of your car goes down with every kilometer that you drive. The lesser you drive your car, the lower the car depreciation per km will be
  • Get your car fixed every time an issue pops up. Do not keep any repairs pending for later. A car that does not have any major problems will be preferred by buyers over other cars. 
  • Go easy on modifications. Making major modifications to your car can reduce the value of your car heavily. 

Using Car Depreciation To Your Advantage

If you are looking forward to buying a car, a used car specifically, car depreciation is a friend, not a foe. You can benefit from the depreciating values of a car when purchasing a car. The following are some advantages you can get from depreciating car values:

  • Choose a car that has not been through a lot of rough and tough usage. Gently used cars that have been on lease previously are great for this purpose. There is a driving limit on these cars and hence the wear and tear are minimal and you can get a nearly pristine vehicle. 
  • Choose the right color for your car. Black, white, grey, and silver cars depreciate at the lowest rates and you will not have to worry about depreciation with these colors. Limited-run colors with a difference in demand and supply will also have a better value. 
  • Follow the market trends to find cars with the lowest and highest resale values to find the car that suits you the best. 
  • Lease to buy a car. This will help you get a car for lower than the actual resale price of the car. 
  • Drive your car unless you can’t drive it anymore. If you do not wish to consider the vehicle depreciation rates, you must just keep driving your car unless there is no possibility of driving it anymore. 

Conclusion

Even though a car is a depreciating asset, it is a necessity if you know how to drive and you need to commute to work or any other place very regularly. In this article, we have looked at vehicle depreciation in detail to help you understand the rate of depreciation, how the value of a vehicle is calculated and what factors contribute towards the depreciation of a vehicle. While the depreciating value of a car can be a disadvantage for the owner, you can benefit from the same by following the tips we have shared with you. The value of any vehicle goes down by a certain value each year and as a car owner, you can follow a few easy steps to maintain a high value of your car. 

FAQs

How do you calculate depreciation on a vehicle?

The average depreciation rate of a car is 25% in the first year and 17.5% every year thereafter. To calculate the depreciation value you should multiply the price of the new car by 0.75 for the first year and the depreciated value by 0.825 for every year after that. 

Which depreciation method is best for cars?

The best depreciation method for cars is the Modified Accelerated Cost Recovery System (MACRS). 

How long does it take a car to be fully depreciated?

It takes around 5 to 8 years for a car to be fully depreciated. 

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