Why does my car depreciate, and why does it matter?
What is depreciation?
Depreciation is the percentage your vehicle drops in value with use. In other sectors of activity we talk about amortization. This decrease is inevitable and varies according to the make and model. It’s generally between 15 and 30 percent in the first year and usually reaches 50 percent after three years.
The decline is significant, which is why the resale value based on depreciation is a key factor to consider when you’re thinking about buying a new car. But it’s also important to know that depreciation is not necessarily related to the selling price. Some cars retain their value better than others.
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Depreciation is basically an accounting method established by companies (we’ll come back to this later) that is used as a basis for calculation at the time of purchase. The resale value, however, is based on the popularity, demand for and general condition of your vehicle and is the actual value of your car after a given period of time.
Take a few minutes to browse through Kijiji’s ads. You’ll see loads of new vehicles, and you’ll be able to compare the resale prices of used cars. You’ll see that some cars, although originally sold at the same price, sell for more than others once they’re a few years old. That’s the law of the market at work, not depreciation.
How is depreciation calculated?
In fact, there is no precise way for a buyer to calculate depreciation. Manufacturers rely on depreciation projections made by specialized firms that use historical data, market statistics and reliability results for each model.
As explained earlier, depreciation is an accounting measure that is used to establish a theoretical value for a car at the end of a given period. It helps to determine insurance value, for example, or replacement value. Companies that are specialized in this field determine the residual value of a car at the end of a lease contract based on the depreciation rate of the vehicle.
What difference does this make for you?
Buying a new car is like buying any other product. After a while, it loses some of its value, and if you want to resell it, you have to take that into account.
You should know, however, that you can find comparison tools online that will give you a good idea of the future value of your car. It could be an important factor in choosing the type you want. Some models, such as mid-size family sedans, are declining more than most other vehicle categories because of their decreasing popularity.
Depreciation is inevitable, but as a wise buyer, you already know that. Just take it into account in your budget when you purchase the vehicle. Better still, keep your car for more than six years, and you won’t even have to consider it. At that point, only the condition of your vehicle and the quality of maintenance will determine the resale value!