How Does Vehicle Depreciation Work
If you’re on the market for a new or used vehicle, there are many factors to consider. Besides personal preferences and individual needs for you and your family’s lifestyle, there is vehicle depreciation. Here we explain what it is and how it works.
Asset or Liability?
Certain purchases we make accrue in value with time. They either improve with age or they become more sought after,therefore making them assets. Unfortunately your vehicle can only be classified as an asset if its current value is greater than what you owe on it, and even then, it is a depreciating asset. This means the car loses value the moment you drive it away from the dealer.
In addition to this, owning a car comes with on going expenses such as fuel, insurance,maintenance, and repairs. Which is why it is more often considered a liability than an asset.
What is Vehicle Depreciation?
In short, depreciation is the decline in a value of a vehicle from the time you bought it. It is the difference between the purchase price and the selling price.
Not all cars have the same rate of depreciation but most cars depreciate at a rate of about 15 – 30% a year.However, the first year of ownership accrues the highest rate, and decreases as the car gets older. In general, you can expect your vehicle to halve in value after five years of owning it.
What Affects a Car’s Depreciation Rate?
The following factors will increase the rate of depreciation:
- Condition – Any damage or wear and tear
- Mileage – A high odometer reading
- Warranty – A short warranty period
- Service – An incomplete history
- Reputation – Cars believed to be unreliable
- Ownership – Too many previous owners
- Age – Older models
- Economy – High fuel consumption
- Size – Big luxury cars with higher expenses
Demand – Low demand, high supply
Modifications – Spoilers and other non-standard fittings
How to Beat Vehicle Depreciation
Depreciation is inevitable, but since owning a vehicle is mostly a necessity in South Africa, we can try to minimize the effects. Especially if you’re buying a used car, begin by choosing a quality used car that will hold its value. Take heed of the list above and then consider the following:
- Buy as new as possible with lowest mileage.
- Avoid outrageous shades -neutral colours stay popular for longer.
- Features such as central locking, safety, air conditioning, CD/MP3 player, etc. improve resale value.
- Service regularly.
- Maintain and keep the body in good condition.
In general it makes sense to buy a quality used vehicle with low mileage. But this becomes even more important when you begin to consider depreciation values and what your vehicle will end up being worth when you eventually decide to sell it.