As discussed in our previous article about Car Depreciation, the most significant amount of depreciation occurs in the car’s first year of being on the road being about 20-30% depreciation. On average, the car will depreciate by 17.5% after the first year. As an example, we will use these numbers to show how to calculate the rate of depreciation.
If you want to see how much a new car will depreciate, you can simply use this formula:
Value after 1 year: Price of the new vehicle x 0.75
Value after 2nd year: Value of the vehicle after the second-year x 0.825
Value after 3rd year: Value of the vehicle after the third year x 0.825
Value after 4th year: Value of the vehicle after the fourth year x 0.825
Value after 5th year: Value of the vehicle after the fifth year x 0.825
Now, let’s say you’re calculating a vehicle’s depreciation based on its MSRP of 32,099.
Value after 1 year: $32,099 x 0.75 = $24,074
Value after 2nd year: $24,074 x 0.825 = $19,861
Value after 3rd year: $19,861 x 0.825 = $16,385
Value after 4th year: $16,385 x 0.825 = $13,518
Value after 5th year: $13,518 x 0.825 = $11,152
As you can see, after five years, a new car priced at $32,099 is only worth $11,152. Essentially it would cost $20,947 for only the cost of ownership, not including fuel, insurance, registration, or any other maintenance the vehicle may require for five years.
The value of your vehicle affects your insurance premium in four ways:
The inevitable depreciation that comes with car ownership is unfortunate, however, you can make use of this fact as a car buyer by following these tips.
Colour of the car counts: As we discussed earlier, the colour of a car can affect the rate at which a car depreciates. Typically, grey, silver, black and white vehicles depreciate at the slowest rate so do your best to buy a car within one of those four colour palettes.
Look at market trends: For whatever reason, some vehicles have lower resale values than other cars so it’s important to consider this when buying.
Shop for a car with minimal wear: When you’re looking to buy a car, keep your eye out for a car that doesn’t look like it’s been beaten up by the previous owner/owners. Ideally, you find a car that just finished a three-year lease term, because leases typically have low mileage limits, so it’s likely the vehicle should still be in good shape.
Drive it until it’s dead: If you don’t want to have to worry about the rate of depreciation, whether you buy a new or used car, drive it until it won’t drive anymore. If you’re not worried about resale value, why would you be worried about the car’s value?
If you plan on reselling every car you buy, you should follow these four tips to keep your car’s value as high as possible.