Easy Way to Calculate Car Depreciation
Easy Way to Calculate Car Depreciation
Posted on April 18, 2024
Let’s figure out how to calculate car depreciation and how to make the best decision.
As discussed in our previous article about Car Depreciation, the most significant amount of depreciation occurs in the car’s first year on the road, which is about 20-30% depreciation. On average, the car will depreciate by 17.5% after the first year. As an example, we will use these numbers to show how to calculate the rate of depreciation.
If you want to see how much a new car will depreciate, you can simply use this formula:
Value after 1 year: Price of the new vehicle x 0.75
Value after 2nd year: Value of the vehicle after the second-year x 0.825
Value after 3rd year: Value of the vehicle after the third year x 0.825
Value after 4th year: Value of the vehicle after the fourth year x 0.825
Value after 5th year: Value of the vehicle after the fifth year x 0.825
Now, let’s say you’re calculating a vehicle’s depreciation based on its MSRP of 32,099.
Value after 1 year: $32,099 x 0.75 = $24,074
Value after 2nd year: $24,074 x 0.825 = $19,861
Value after 3rd year: $19,861 x 0.825 = $16,385
Value after 4th year: $16,385 x 0.825 = $13,518
Value after 5th year: $13,518 x 0.825 = $11,152
As you can see, after five years, a new car priced at $32,099 is only worth $11,152. Essentially it would cost $20,947 for only the cost of ownership, not including fuel, insurance, registration, or any other maintenance the vehicle may require for five years.
3 Least Depreciating Vehicles of 2022
- Jeep Wrangler Unlimited
- Toyota Tacoma
- Jeep Wrangler
3 Vehicles That Depreciate the Most of 2022
- BMW 7 Series
- BMW 5 Series
- Nissan Leaf
How Does Car Value Affect Insurance Rates?
The value of your vehicle affects your insurance premium in four ways:
- Value of the car: The more valuable your car is, the more it’s going to cost to insure it. If you have an expensive car that needs repairs, the repairs are going to cost more than if you have a cheaper car that needs repairs.
- Coverage maximums: If the car isn’t worth a ton of money, high coverage maximums may not be necessary.
- Types of coverage: If you have an older car that isn’t worth a lot of money, you can consider dropping collision and comprehensive coverage.
- Safety: Older vehicles with low safety ratings that don’t have the latest safety features typically won’t benefit from any potential safety device discounts.
Using Depreciation To Your Advantage When Buying
The inevitable depreciation that comes with car ownership is unfortunate, however, you can make use of this fact as a car buyer by following these tips.
Colour of the car counts: As we discussed earlier, the colour of a car can affect the rate at which a car depreciates. Typically, grey, silver, black and white vehicles depreciate at the slowest rate so do your best to buy a car within one of those four colour palettes.
Look at market trends: For whatever reason, some vehicles have lower resale values than other cars so it’s important to consider this when buying.
Shop for a car with minimal wear: When you’re looking to buy a car, keep your eye out for a car that doesn’t look like it’s been beaten up by the previous owner/owners. Ideally, you find a car that just finished a three-year lease term, because leases typically have low mileage limits, so it’s likely the vehicle should still be in good shape.
Drive it until it’s dead: If you don’t want to worry about the rate of depreciation, whether you buy a new or used car, drive it until it doesn’t drive anymore. If you’re not worried about resale value, why would you be worried about the car’s value?
How To Keep Your Car Value High
If you plan on reselling every car you buy, you should follow these four tips to keep your car’s value as high as possible.
- Keep scent-free: If you smoke in your car regularly, no matter how many times you spray Febreze the vehicle will always have a lingering cigarette smell. Having your car smell like cigarettes or any other unpleasant smell will decrease its value.
- Keep it clean and without stains: While we all have times when we’re forced to eat in our car, make sure you’re not a messy eater and are bound to leave stains. Any stains or spills in the interior of the car will decrease the value.
- Keep the miles low: This can be a tough one depending on your lifestyle but if you can manage to keep your mileage down you should. The more kilometres you’ve put on the car, the lower the car will be valued.
- Fix any problems: If your car has been making funny noises for the past two weeks, take it to a mechanic to get it checked out. It’s important you keep your car in good working condition if you don’t want to see it lose its value.
- Don’t go crazy with customizations: We’ve heard the rumours too, if you add a spoiler and paint your car neon pink your car will drive 20% faster. Although speed is great, this will likely result in fewer people being willing to buy the car from you.