How Is Car Depreciation Calculated?
Depreciation is how quickly a car loses its value over time. While this number may seem like an abstract concept, it does affect your car’s overall worth. Finance experts base this figure on a range of factors.
However, getting an estimate of your car’s depreciation is possible without hiring an accountant. There are numerous online valuation tools that you can use to get a sense of how much value your vehicle has lost.
Although depreciation is a noncash expense and it won’t affect your monthly payment, paying attention to your vehicle’s depreciated value of the car is essential for several reasons.
Whether you’re looking to trade in your vehicle or sell it to buy a new car, having a sense of how much cash you can get for it is essential to your budget planning.
The reverse is also true. Knowing how quickly a new car will depreciate will help you decide if buying it is a good deal. You don’t want to finance a vehicle with an extended loan term only to end up owing more than the car is worth.
So if you’re wondering how fast this process happens, stick around. We’ll give you a few ways to find out how to estimate your car’s average depreciation rate.
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How Much Does a Car Depreciate?
Depreciation starts racking up the minute your drive off the dealer’s lot. A new vehicle will lose at least 20 percent of its original value in the first twelve months. That means that your $50,000 SUV is only worth $40,000 just a year later.
Car shoppers will want to consider the long run too. If you have a sixty-month loan, by the time you pay it off, your car loses as much as 60 percent of what it was worth when you bought it. With that said, cars depreciate differently over time. The value of the car lost depends on several factors, including:
Make and Model
It’s no secret that some manufacturers produce better cars. These makes and models hold more of the value of the car longer than rivals. Many trucks, SUVs, and sports cars have a low depreciation rate, even after five years.
Other models like luxury, electric, and alternative fuel vehicles may lose their value more quickly than others. For example, the Jeep Wrangler offers the lowest depreciation at 9.2 percent, while the Nissan LEAF car depreciates the most at over 65 percent.
Mileage Readings
Mileage also factors in heavily when calculating car depreciation. Typically the more you use it, the faster the value of the car drops. Most Americans drive around 13,500 miles a year. While that’s more than 1000 miles a month, if you commute more than that, your car depreciates at a higher rate than the same make and model with a lower odometer reading.
Physical and Mechanical Condition
How well you maintain your car matters too. If you stick to the manufacturer’s routine maintenance schedule, on time, every time, and your vehicle is in “like-new” condition, it will hold its resale value longer than one that’s worse for wear.
How to Calculate Car Depreciation
There’s an easy formula you can use to evaluate how much your car has depreciated. First, find your car’s fair market value as of today. You can find an estimate by using a car depreciation calculator online. Then, subtract that number from the purchase price. Remember to take out any sales tax or other fees. You want just the vehicle’s actual cost.
There are also programs online that will calculate this for you. Many are free to use. However, remember this is just an estimate. It’s challenging to provide an accurate figure with the basic algorithm that a car depreciation calculator uses.
It’s also helpful to look at used car dealerships’ online inventory to see how much it priced your model or a similar one. Checking the value of older versions of your car will also give you an idea of how much your vehicle will be worth down the road.
How to Minimize the Impact of Car Depreciation
Depreciation can be quite costly when it’s time to sell or trade in your automobile. However, there are some steps you can take to help minimize the impact of depreciation, such as:
Buy a Car with High Resale Value
Consider shopping for cars with high resale values. With some research, you can uncover vehicles in a number of categories, from sedans to work trucks, that have outstanding resale values. Vehicles with a high fuel economy estimate also retain their value, as do cars painted in classic colors like black, silver, and white.
Have It Serviced Regularly
Car depreciation rates are linked directly to the car’s overall condition. Whether it’s mechanical issues, interior wear and tear, or its exterior appearance, the more you do to keep it looking new, the longer it will maintain its value.
Make sure to have it serviced by a certified technician regularly, and keep it in good shape, inside and out. Consider having it professionally detailed once a month if that’s in your budget. Providing it with diligent care may prove to be a sound investment when you decide to sell it.
Avoid Modifications
While those after-market modifications look fantastic to you, they can adversely affect your car’s value. Avoid paying additional depreciation by saying no to options like spoilers and flared wheel arches. Not only do customizations drop your car’s value, but they’ll also drastically limit your number of potential buyers.
Consider Your Traveling Alternatives
Because high mileage can mean more vehicle depreciation, always keep your eye on the odometer. Consider joining the carpool group at work or taking public transportation.
If you need to travel for vacation, consider flying instead of embarking on a road trip. You can preserve your car’s value by making the journey in the air.
Timing Is Everything
If you want to learn to estimate depreciation because you’re ready to sell your automobile, make sure you pick the right time of year. For example, list your convertibles during the summer to secure a high purchase price.
On the other hand, if you have an SUV with an all-wheel-drive powertrain, wait until the snow flies to advertise it. Winter may be the best time to get top dollar from your buyer, so you pay less in vehicle depreciation.
Car Depreciation for Tax Purposes
You may also be able to deduct your car’s depreciation on your tax return. There are several methods accountants use to evaluate the type of depreciation, including:
MACRS depreciation: The vehicle’s cost is spread over five years, with higher deductions taken in the first few years.Section 179 deduction: Owners can deduct $25,000 for a business-related truck or SUV during the first year.Special depreciation allowance: The maximum deduction is $18,000 for the first year with this method as well and only for the car that you use for business.
No matter the method you choose, learning how to determine vehicle depreciation with our beginner’s guide could save you money.
Whether you buy a new or used car, it impacts every vehicle. If you want more than an estimate of your car’s lost value, use a car depreciation calculator or consider hiring a tax professional.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
