What is Depreciation?

Our ‘What is Car Depreciation’ guide explains everything you need to know about why cars lose their value.

Published: 15th September 2016

Depreciation is the reduction in the value of a tangible asset over a period of time. This reduction is due to a number of reasons, including mechanical aging and deterioration.

Read below to learn more about depreciation, with the information provided by ALA GAP Insurance.

What is Car Depreciation?

Car depreciation is the difference between the value of a car when bought and how much the new owner gets for the car once sold at a later date. Depreciation is important for car owners to understand as most cars lose between 50% and 60% of their value in the first three years of ownership.

For most cars the biggest drop in value comes in the first year. There is then a gradual fall for the next two years, but after the eighth year the fall is virtually negligible. It is important to note that the rate of depreciation for a car depends on a number of factors including manufacturer, model, price and quality.

Depreciation Factors

Cars that are cheaper to run tend to decrease in value slowly. As oil prices fluctuate over time, the running costs of cars also rise and fall. As a result, cars with large engines and high MPG can be hit quite heavily by depreciation.

Model replacement cycles can certainly have an effect of the value of a vehicle. Cars that hold their value tend to be popular models that are not regularly replaced by newer models.

Similarly, popular cars that have long waiting lists that exceed supply tend to hold their value better in the first few years of initial release.

Depreciation Avoidance Guide

  • Research – Before buying a car, check the new model and used model prices to get an idea as to how much a new car may drop in value over time.
  • Maintenance – Wear and tear are depreciation factors. Ensure the car is well maintained and in good working condition.
  • Mileage – Similarly, check if your car has excessive mileage, which can also have a negative impact on the value of the vehicle.
  • Leasing – If owning a car is not an important factor, then leasing a car instead means depreciation is no longer a concern.
  • New models – Cars that are regularly replaced by a newer model depreciate quicker. Ensure you sell your car before a new model hits the showroom.
  • Selling at the right time – Similarly, if you do intend to sell your car, remember to do so at a favourable time of year. For example, four-wheel-drive cars in winter and convertibles in summer.
  • Optional extras – The right in-car tech – for example, sat-navs and air cons – can help to prop up the value of a car.
  • Car colour – Colours can affect buying a car due to the simple reason that some car colours are more popular than others. If you intend to sell your car at a later date do your research to ensure you get the most popular colour for your prospective vehicle.

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Published: 15th September 2016
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