What Is Car Depreciation? – Aussie Car Loans

What Is Car Depreciation?

Car Depreciation

After buying a brand-new car and driving away from the dealership or showroom, you are probably too happy to think of anything else. However, as soon as you hit the road, the value of your car has already gone down. In fact, your new car is losing kilometre you drive it. This is something that you can’t avoid and it is called car depreciation.

Just like any tangible asset (except land), cars depreciate and lose their value over time because of age, wear and tear, and obsolescence. It is the biggest cost of car ownership, much more than insurance and maintenance cost. Cars can lose around 20-25% of its value after just a year, and more than 50% after three years. Of course, this is not something that you would think about while enjoying your new car, but it will be very important once you decide to sell it. As a financially smart individual, you would want your car to have a high residual value, which is your car’s worth by the time you want to sell it.

There are some steps that you can do to minimize the effect of car depreciation. Consider the following advice before and after purchasing your car.

Be Smart When Purchasing a New Car

Every car brand and model is different in terms of depreciation. Some cars depreciate faster than the others so you must do your research well before handing out your cash or signing up for finance. Here are the things that affect a car’s depreciation and residual value:

  1. Sales Volume – Avoid purchasing car models that are very popular and you can see almost anywhere in the street. Since there are a lot of them in the used car market, they will have a lower resale value compared to other car models.
  2. Rarity – On the other hand, if the car has not had a recent version in years or had a complete redesign, it will likely have lower resale value as well.
  3. Strong and reliable brand – Brands and models that have gained great reputation depreciate much slower compared to others. So, purchase those with an outstanding record in terms of reliability and quality like Toyota, Mazda, and Subaru. Avoid purchasing lesser-known brands no matter how cheap their cars are.
  4. Year of Manufacture – Depreciation is calculated from the time the car is manufactured and not when it is purchased. Make sure to compare the prices of this year’s model from last year. If there is only a small difference, then always go for the new model. On the other hand, if you buy during year-end sales or run-out sales, prices for old models can be much lower. In which case, your savings can outweigh the future depreciation cost.
  5. Car Colour – Keep it generic, it might be exciting for you to have an orange or purple coloured car, but most used-car buyers don’t think so and this can go against you. Better opt for more popular colours like silver, black, and white so you can demand higher resale value.
  6. Other Factors – A car’s performance, fuel economy, safety ratings and transmission type also matter when determining its resale value.

Maintain as much Value as you can

Simple things can go a long way when it comes to keeping your car’s value. These includes:

  1. Regularly having your car serviced and keeping all the maintenance records so you can show that it is well taken care of when it’s time to sell it.
  2. As mentioned before, mileage plays a big role in a car’s depreciation. The lower mileage number your odometer shows, the better it is for the car’s resale value.
  3. Keep the car in a garage as much as possible to avoid wearing due to natural causes like the sun, rain, and dirt.
  4. Repair minor damages right away before they become bigger. Small burns, scratches or dents are likely to be noticed by buyers which will have a negative effect during price negotiations.
  5. Keep the interior and exterior of the car clean by regularly washing and polishing them. Use stain remover on car seat leathers and a small vacuum to remove the dirt. Also, consider getting good quality seat covers and rubber floor mats. These habits will keep the brand-new look on your car and will impress future buyers.

Car depreciation is not something that you should ignore if you want to make financially wise decisions. While you cannot really avoid car depreciation, you can still lessen its effect and maintain a good resale value on your car.

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