How does car depreciation work?

07 Apr 2022

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How car depreciation works

After their house, a car will be the largest purchase that most Australians ever make.

Unfortunately, while houses tend to go up in value, cars go down. This decline in value is called depreciation.

It is generally accepted that your car loses value as soon as you drive it out of the dealership, and the process continues from there.

But it's not all doom and gloom. While it's hard to stop your vehicle from depreciating, there are steps you can take to slow it down and maximise its resale value.

What is depreciation in a Car?

The reduction in a car's value between the time you buy it and when you wish to sell it is known as depreciation. So, how much does a car depreciate per year? After you drive a new vehicle off the dealer's lot, somewhere between 10% and 15% of its value vanishes, depending on the make and model. By the conclusion of the first year, the loss has increased by another 10-15%, making it the sharpest phase of loss on the vehicle’s depreciation curve.

Aside from the obvious loss of value due to wear and tear, car makers also introduce new models with improved features and equipment every 3-6 years. These newer models have shorter-and-shorter product life cycles, and when a refresh is issued, the prior versions become outdated almost instantly. This has had the effect of speeding up the depreciation process in recent years.

How does depreciation work on cars?

In Australia, depreciation is the single most expensive aspect of vehicle ownership.

After three years, a car with an average depreciation rate loses up to 58 per cent of its starting value, 49 per cent after four years, and 40 per cent after five years. After 10 to 11 years, the value of some car types and models may be close to zero. As a result, car owners favour popular vehicles with greater resale prices.

The following are some of the elements that impact car depreciation:

  • Age of the vehicle — The older a vehicle gets, the lower its value becomes. A vehicle's age is measured by its appearance and mileage.
  • Make and model – Toyota, Mazda, Ford, and Honda are all prominent car brands in Australia. SUV types are particularly popular, which raises their market value.
  • Maintenance quality — The better maintained a car is, the slower it depreciates, especially if maintenance records are provided as proof.
  • Interior and external condition of the vehicle - Upgrades such as tinting, leather interiors, and surround sound audio can increase a car's worth.
  • Fuel economy — Fuel-efficient automobiles are less expensive to operate and have a higher long-term resale value.

 The market price of a car, and consequently the rate of depreciation, is affected by both objective and perceived quality. The term "quality" relates to the car's dependability and brand image.

Depreciation of vehicles used for work

People often ask “can you claim depreciation on your owner-occupied car?” The answer is that you cannot claim depreciation on a vehicle that is solely for personal use. However, people who use their cars for business can deduct a portion of the depreciation from their taxes. If the car is registered to a company, the ATO permits them to depreciate their vehicle according to a specified car depreciation rate over a 5-year period.

When determining the depreciation cost of a work-related vehicle, there is a car depreciation limit. Every year, the upper limit is raised. You use the car limit that applies to the year you first use or lease the car. The car limit for 2021–22 is $60,733.

How can I minimise my vehicle depreciation?

Choose wisely

According to studies, Australians prefer automatic transmission cars to manual transmission. They also like cars that are white, black, red, or silver, as well as well-known manufacturers like Toyota, Honda, and Mazda.

Choose a car that prospective purchasers are more likely to be interested in down the track if you want a car with slower depreciation and a high resale value.

Buy carefully and negotiate hard

The first step is to choose the best manufacturer, model, and version. To minimise the pain of selling or trading in your car in the future, be sure you don’t overpay for it in the first place.

It's just as crucial to keep the car in good shape as it is to select the correct car. A vehicle's depreciation will be slower if it receives fewer dings and scratches.

Consider an automobile that is practically new or little used

 Buy a secondhand vehicle that has already seen its initial big value decrease to reduce depreciation. For example, a car that has been driven for three years or less has seen a significant reduction in value. Purchasing such a vehicle saves money on the purchase price while preserving the majority of its worth for the next three to four years. You can sell the car without losing a lot of money due to depreciation if you've kept it in good shape.

Cleaning and maintenance

Keeping a car clean and well maintained reduces its rate of depreciation and preserves its market resale value. It serves the very beneficial goal of making the asset more appealing to potential purchasers. Servicing on a regular basis reduces wear on the engine, tyres, and other components.

Limit your mileage

The higher a car's mileage, the faster it depreciates. Avoid frequent long-distance excursions if you want to protect your car's market value. According to the Australian Bureau of Statistics, the average passenger vehicle travels 11,100 kilometres each year. Exceeding this limit might have an influence on the vehicle's future resale value.

How to calculate depreciation

To calculate depreciation: Calculate the current approximate resale value of the used car (using sites such as Redbook as a price guide) and subtract that from the new price of the car.

Divide the difference by the new car value, then multiply by 100. For example - $20,000 - $12,000 = $8000. $8000 / $20000 x 100 = 40% depreciation.

Cars with the best resale value

You can save a lot of money in the long term by picking a car with a lower depreciation rate. In most situations, the higher-cost versions of cars depreciate less than their base-model counterparts.

The following are some of the most common car types and models in Australia that depreciate the least:

Conclusion

Knowing your car's probable depreciation value might help you pick a car with a higher resale value down the track, saving you money over time.

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