Cars depreciate in value over time. That’s common knowledge even among the non-automobile savvy. But, a lot of people don’t really understand what that means or how to calculate car depreciation.
Knowing the specifics about car depreciation is vital especially if you’re thinking of buying a new car or selling your current one.
To help you out, we’ve created this handy guide with everything you need to know about car depreciation:
What is car depreciation?
First off, let’s define it. Car depreciation is when a car decreases in value over time. It specifically refers to the difference of the car’s value from when you bought it to when you want to resell it. A car loses between 10% to 15% of its original value as soon as you drive it off the dealership.
You might be wondering why cars depreciate in value so much. In addition to the general wear and tear that comes from use, cars lose value because newer models are released year after year accelerating its depreciation.
It’s not all bad news though. In Australia, you can claim a portion of your car’s depreciation value against your taxes. This is, of course, subject to the conditions set by the Australian Taxation Office (ATO).
For the financial year 2022-2023, the depreciation limit for cars used for business is $64,741. Meanwhile, the car depreciation limit for luxury vehicles is $84,916 for fuel-efficient vehicles or $71,849 for all other luxury vehicles.
Calculating for car depreciation
There are two ways you can calculate the depreciation value of your car: the prime cost method and the diminishing value depreciation method.
Prime Cost Method
This calculates the depreciation through the years at a fixed rate. Using this method, you can estimate how much value is lost per year.
Total cost of the car x (days owned ÷ 365) x (100% ÷ effective life in years) = Lost value
You bought a brand new car for $45,000 and you’ve owned it for a year. A car’s effective value is typically around 10 years depending on the make and model. So, the value lost per year would look something like this:
$45,000 x (365 ÷ 365) x (100% ÷ 10) = $4,500
For this method, you continue to subtract the same lost value every year against the total cost.
Diminishing Value Method
The diminishing value method is a bit more complex. This calculates the diminished value of a car in a single year. As the car depreciates, you must calculate the depreciation against the new value of the car.
Total value of the car x (days owned ÷ 365) x (200% ÷ effective life in years) = Lost value
You bought a brand new car for $50,000 and owned it for a year with an effective value of 10 years. You should have something that looks like this:
$50,00 x (365 ÷ 365) x (200% ÷ 10) = $10,000
This is how much your car will depreciate in value in the first year. When calculating for the second year, you have to subtract the lost value with the original value of the car and then follow the formula again. It will go as follows:
$40,000 x (365 ÷ 365) x (200% ÷ 10) = $8,000
To calculate for the succeeding years, you must always subtract the lost value with the total value of the car to have an accurate estimate.
Do some cars depreciate faster than others?
Unfortunately, yes. Cars depreciate in value for a whole host of reasons that we’ll touch on later on. But the crux of it is that car depreciation depends on factors such as the type of car, the condition of the car upon resale, and whether there will be a new model coming out soon.
What contributes to car depreciation?
Here are the most important factors that contribute to a car’s depreciation value:
Cars depreciate in value as they get older. There’s no getting around that. Some cars depreciate in value quickly too with value decreasing up to 58% in the first three years. It might depreciate even further from 49% in four years and 40% in five years, and could lose almost all of its value after 10 years of use.
Cars that are more fuel efficient have more value because they’re more cost efficient. A more cost-efficient vehicle has a larger resale value.
Also, in today’s current climate, car owners and buyers are looking to lessen their environmental impact and carbon emissions. Having a more fuel-efficient car helps with that as well.
Make, model, manufacturer, and history
The popularity of a car’s make and model affects its value. For example, if pick-up trucks are a sought-after model, then they depreciate in value much slower compared to less popular makes and models.
Cars from more established manufacturers like Toyota, Mazda, Hyundai, and Kia will likely experience slower depreciation compared to lesser-known manufacturers. This is partly because of reliability, convenience of maintenance services, and running costs.
Quality of maintenance and current condition
If your car is properly maintained, complete with proof of maintenance and service history, then it can help slow down depreciation. Additional modifications made to the car like leather seats, upgraded sound system, and the like will also improve the car’s overall value.
The number of owners also affects the value of a car and if it has been in an accident. If a car has been resold multiple times or has been in accidents, it negatively impacts its value.
Mileage is one of the most important factors that affect value. The higher the mileage is on that odometer, the less value you’ll get for your car. More kilometres on a car means it’s been used more and experiences much more wear and tear compared to a car that has fewer mileage.
Can you increase a car’s resale value?
The good news is: yes, you can! Just because cars decrease in value overtime doesn’t mean you can’t do anything about it. Here are some key tips on how to increase your car’s resale value:
- Keep mileage down (as much as possible). Avoid long distance trips to keep the market value of your car.
- Use your car carefully. The less dents and knocks it has, the more value you’ll get for it once it’s resold.
- Maintain your car properly. This means regularly maintaining it, keeping it clean, and making sure that everything is in working order.
- Consider buying a used car. A car’s drop in value happens during the first few years. By buying a used car, you’ll avoid the massive depreciation while saving money. And you can resell it without losing too much to depreciation.
Keep these in mind when it’s time to buy or sell your car so you can make an informed decision. If you’re thinking of financing your new car, check out some of carloans.com.au’s loan options.