Everything You Need To Know About Car Depreciation

Posted by Motorama in Buyer Advice

As far as large purchases go, a car for most people, is typically second only to a house. But unlike a house, a car is a depreciating asset. Some say it starts losing value the moment you drive it out of the showroom, but is that really true?

It’s important that you know how what causes car depreciation, to make an informed decision when buying or selling a car, and what factors matter most.

What is Car Depreciation?

Car depreciation refers to the difference in car value between the point of purchase and the point at which you want to sell it. In simple terms, it is a decrease in value over time. Depending on the make and model, around 10% of a new car’s value disappears once you drive it out of the showroom, and another 10-15% is lost by the end of the first year, making it the steepest period of loss on the depreciation curve. Aside from the loss in value from wear and tea r, every time a new model, with better features and equipment is released, the previous models are immediately outdated. This tends to accelerate depreciation even further.

What Causes My Car To Depreciate?

The main factors that influence car depreciation include:

  • Age of the car – The older a car is, the less value it has. The physical appearance and mileage of a vehicle are used to calculate its age.
  • Fuel efficiency – Fuel-efficient cars are cost effective and have more long-term resale value.
  • Make and model – Car brands and models that are popular in in Australia, like SUV's, usually depreciate slower than makes and models which aren't in high demand.
  • Quality of maintenance – The better maintained a car is, the slower its depreciation will be, especially if records of its maintenance & service history are available as proof.
  • Condition of the vehicle’s interior & exterior – Modifications such as tints, leather interior or an aftermarket surround sound audio, could improve a car’s value.

If you purchased two identical cars, parked one in a garage and drove the other one, which one do you think would be worth more in three years time? Right, the one with lower kilometers. And if you would drive both, but maintain only one of them. Which one would depreciate less than? Right, the one that's in better condition. It's vitally important to treat your car well. Make sure you service it according to the manufacturer’s maintenance schedule. Keep all receipts and documentation, and make sure to look after your car by keeping it clean and tidy.

How To Calculate Your Car Depreciation

There is no clear cut way of calculating your car's depreciation, as it depends on many factors. But there are two different ways to calculate a general figure:

Prime Cost Method (calculating the vehicle’s drop in value as a fixed percentage of it cost):

Cost of Running the Car x (days owned ÷ 365) x (100% ÷ Effective life in years) = Lost Value

Diminishing Value Method (using the car’s base value to calculate depreciation):

Value of the Car upon Purchase x (Days owned ÷ 365) x (200% ÷ Effective life in years)

Reduce Car Depreciation

Every car will depreciate, unless it's a classic or a collectors item. But there are ways to reduce your cars depreciation:

Choose carefully

Studies show that Australians prefer automatic transmission vehicles to manual ones. They also prefer cars with a white, black, red or silver paint job. If you want a car with a slower depreciation and high resale value, choose a car that future prospective buyers are likely to be more interested in.

Use carefully

Keeping the car in great condition is just as important as buying the right car. The fewer knocks and damages a vehicle suffers, the slower its depreciation will be.

Consider a nearly-new or hardly used car

Minimise depreciation by buying a used car that’s already past its initial major value drop. For example, a car that’s used for three years or less would have experienced its initial sharp drop in value. Buying such a car saves money on the purchase price whilst retaining most of its value for the next three to four years. You can sell the vehicle without losing much value to depreciation, especially if you’ve kept the car in excellent condition.

Regular cleaning & maintenance

Keeping a car clean and properly maintained minimises its rate of depreciation and maintains its market resale value. It services a very useful purpose of being more attractive to potential buyers. Scheduled maintenance and servicing also minimise wear to the engine, tyres and more.

Minimise Kilometres

The more kilometres a car racks up, the more it depreciates. If you intend to maintain the market value of your car, avoid frequent long distances trips. According to the Department of Transportation, the average annual mileage for a car is 13,500. Going beyond this figure could significantly impact the vehicle’s future resale price.

Buy from Motorama Pre-Owned

Selecting the right make, model and variant is only the first step. In order to minimise the pain when you go to sell or trade in your car in years to come, it’s vital to ensure that you have not overpaid for your car in the first instance. With Motorama Pre-Owned, you can take advantage of our large selection of quality pre-owned vehicles that all come with lifetime engine warranty. You won’t need to worry about putting yourself in the uncomfortable position of a high-pressure negotiation because it's all haggle free.

Motorama have been selling cars in Brisbane since 1960. We retail new cars brands including Toyota, Holden, Kia, Mitsubishi, Ford, Jeep and Nissan, at our dealerships in Moorooka, Springwood & Browns Plains.

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Motorama have one of the largest selections of quality pre-owned cars for sale in Brisbane. If you are in the market for a business vehicle, we will have the right car for you at one of our convenient locations.

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Financing your car at Motorama is quick and easy. Our fully trained and accredited Business Managers are specialists in automotive finance and insurance. They are more than happy to answer any questions you may have during the car buying or financing process.

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At Motorama, customer convenience is our major focus and we are proud to offer our Home Drive Service. Home Drive provides a link between reserving your car online and visiting Motorama - allowing you to purchase completely from the comfort of your home or work place.

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