It's important to understand how depreciation impacts a car's worth. You should know every factor that affects a car's depreciation if you own or plan to acquire one. This will assist in getting ready to buy an automobile or perhaps sell your current one.
What is Car Depreciation?
The difference in a car's worth between the time it was purchased and the time it is sold is known as depreciation. In practical terms, it is a gradual decline in the value of a car over time dependent on a number of circumstances. New cars depreciate far more rapidly than secondhand ones.
In reality, the value of a new car drops by up to 60% in the first three years after purchase. Before you purchase a car, it is crucial to understand how much they depreciate. We say this because, in the end, the value you receive when you sell the car is its depreciated worth.
Knowing the many elements influencing automotive depreciation becomes so crucial. The value of every car decreases over time as a result of normal wear and tear.
Factors Influencing a Car Depreciation
Following the discussion of automotive depreciation above, let's look at the contributing elements to your car's declining worth.
- The number of kilometers driven:
It must be emphasized that automobiles with a monthly mileage of less than 200 km are not desirable. This is because your car is a machine with moving parts that can have problems if left unused and inactive. On the other hand, high-mileage vehicles are also not desirable.
- Service & Accidents history:
It is clear that used car and bike markets reward vehicles with extensive and thorough service histories with higher prices than those without. If a car has suffered serious accidents that have damaged the body frame, its value drops down considerably. Vehicle owners frequently make an effort to hide these serious collisions from prospective customers. Checking for registered significant insurance claims will quickly reveal this.
- Number of Owners:
The number of owners a vehicle has is the most significant factor influencing its value on the used automobile market. The vehicle's Registration Certificate (RC Book) contains this information. It goes without saying that the fewer owners a car has, the higher its value.
- Physical condition:
Any car sold secondhand must have all of its features and functions working flawlessly. Any problem with even a few of these features will reduce the car's value.
Overview of Car depreciation in India
The precise state of the car and the model's accessibility to the market are just two of the factors that impact how much a car depreciates. Insurance firms, however, use a pre-set algorithm to determine depreciation. They analyze it to determine the vehicle's IDV. The Insurance Regulatory and Development Authority of India's depreciation rates are used to compute the depreciated value (IRDAI). The age of the vehicle is a factor in determining these prices. You may learn about India's official car depreciation curve from the table below.
|
Age of Car |
Rate of Depreciation |
|
0-6 months |
5% |
|
6 months – 1 year |
15% |
|
1 year – 2 years |
20% |
|
2 years – 3 years |
30% |
|
3 years – 4 years |
40% |
|
4 years – 5 years |
50% |
|
Above 5 years (for obsolete models) |
Mutually decided between the insurer and vehicle owner |
How to Calculate the depreciation of my Car?
- Using the Prime Cost Technique to calculate the depreciation of automobiles
The equation is: The cost of operating the car X ( number of days it has been owned divided by 365) X (100% /effective life in years).
This method determines the car's depreciation as a specific proportion of its whole cost.
- 2. Applying the Diminishing Value Technique to auto depreciation calculations
The calculation is as follows:
The car's purchase cost X (its effective life you own in years / 365) X (effective life in a number of years /200%)
Using the base value of the car, this method determines the annual rate of car depreciation.
How to minimize my Car depreciation?
There are ways to keep your car's value up by lowering its rate of depreciation. As a result, you can obtain a high IDV and resale value:
- Keep your car serviced and freshened up. This stops deterioration. Regular maintenance is indeed essential.
- Make sure the vehicles you buy have a good resale value. Some car brands and models are more valuable to resell than others.
- A used automobile in excellent condition is available. This indicates that even if you are purchasing a used car, it is already in good shape and will have a high future resale value.
- Drive your vehicle over shorter distances. Your car's value depreciates faster the more miles it has on the clock.
You must be aware through this moment that every car built up to this point has experienced depreciation. Every car buyer, owner, and seller has learned to live with this reality. However, certain automobiles lose value more quickly than others. Additionally, there are other circumstances that accelerate the vehicle's value decline.
When buying or selling secondhand cars, you must take these variables into account. We've covered a few ways you can gain from lower depreciation to make things simpler for you. We're confident that this brief information will assist you in making an informed choice when buying a new or used car.
Happy Learning!
