Often car owners overlook the car’s depreciation, but it is an important factor to consider when purchasing a vehicle. It also factors in when calculating car insurance costs.
Read on to know about car depreciation and how it impacts your car insurance.
What does car depreciation mean?
Car depreciation refers to the decrease in the value of a car as it ages or is used. It is a natural process that affects all cars, regardless of whether they are brand new or second-hand. Depreciation is one of the most significant expenses for car owners, and it is important to understand its rate and the factors that influence it. Car depreciation value also affects the car insurance claim settlement.
An overview of car depreciation rate
Here’s a quick overview of the percentage-wise depreciation of a car’s value over time.
Car’s age |
Percentage of depreciation |
Less than six months |
5% |
Six months – One year |
15% |
One – two years |
20% |
Two – three years |
30% |
Three – four years |
40% |
Four – five years |
50% |
Factors affecting the depreciation rate of car
Several factors can impact the rate of depreciation of a car such as:
Brand and model
The car’s brand and model influence the rate of depreciation. Luxury cars and high-performance vehicles tend to depreciate faster than regular cars.
Age
The car’s age plays a significant role in its depreciation rate. A new car will experience a more significant depreciation rate in its first year of usage.
Mileage
The higher the mileage, the faster the car will depreciate in value.
Condition of the car
Cars in excellent condition will hold their value longer than those in poor condition.
Maintenance history
Cars with a documented maintenance history indicating that the car has been well maintained will retain their value for longer.
How to calculate car depreciation?
There are various methods of calculating car depreciation that can help in understanding its effects on a vehicle's value. Two common ways of calculating car depreciation are the prime cost method and the diminishing value method.
Prime cost method
The prime cost method calculates depreciation as a fixed percentage of the car's purchase price divided by its useful life. For example, if your car costs Rs. 10 lakhs and has a useful life of five years, the annual depreciation using the prime cost method will be 20% of Rs. 10 lakhs, which equals Rs. 2 lakhs per year.
Diminishing value method
The diminishing value method is based on the assumption that the car's value decreases more rapidly in the earlier years of usage because of greater wear and tear. This method calculates depreciation using a higher percentage of the current value of the car.
For example, if your car's initial worth is Rs. 10 lakhs, and the depreciation rate is 25% per year, the car would depreciate by Rs. 2.5 lakhs in the first year, Rs. 1.87 lakhs in the second year, Rs. 1.40 lakhs in the third year, and so on.
Using a car depreciation calculator
While the prime cost and diminishing value methods can provide accurate calculations, it may be challenging to do them manually. Fortunately, there are car depreciation calculators available online that can help in calculating depreciation based on the vehicle's make, model, year, usage, and condition. These calculators provide an estimate of the vehicle's current value using various depreciation calculations.
