Depreciation is how quickly a car loses its value over time. While this number may seem like an abstract concept, it does affect your car’s overall value. Financial experts base this figure on a range of factors.
However, it is possible to get an estimate of your car’s depreciation without hiring an accountant. There are numerous online valuation tools that you can use to get an idea of how much value your vehicle has lost.
Although depreciation is a non-cash expense and will not affect your monthly payment, paying attention to your vehicle’s car depreciation is essential for several reasons.
Whether you want to trade in your vehicle or sell it to buy a new car, having an idea of how much cash you can get for it is essential to your budget planning.
The opposite is also true. Knowing how quickly a new car will depreciate will help you decide whether buying it is a good deal. You don’t want to finance a vehicle with an extended loan term only to end up owing more than the car is worth.
So if you’re wondering how quickly this process happens, stay tuned. We’ll give you a few ways to figure out how to estimate your car’s average depreciation rate.
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How much is a car worth?
Depreciation begins to increase as soon as you drive off the dealer’s lot. A new vehicle will lose at least 20 percent of its original value in the first twelve months. That means your $50,000 SUV is worth $40,000 just a year later.
Car buyers will also want to consider the long term. If you have a sixty-month loan, by the time you pay it off, your car loses as much as 60 percent of what it was worth when you bought it. With that said, cars depreciate differently over time. The value of the car lost depends on several factors, including:
Make and Model
It’s no secret that some manufacturers make better cars. These makes and models hold the value of the car longer than competitors. Many trucks, SUVs and sports cars have a low rate of depreciation, even after five years.
Other models such as luxury, electric and alternative fuel vehicles can lose their value faster than others. For example, the Jeep Wrangler offers the lowest depreciation at 9.2 percent, while the Nissan LEAF car appreciates the most at over 65 percent.
Mileage readings
Mileage is also a big factor in calculating car depreciation. Typically, the more you use it, the faster the value of the car depreciates. Most Americans drive around 13,500 miles per year. Although this is over 1000 miles per month, if you commute more than that, your car depreciates at a higher rate than the same make and model with a lower odometer reading.
Physical and Mechanical Condition
How well you maintain your car also matters. If you stick to the manufacturer’s routine maintenance schedule, on time, every time, and your vehicle is in “like-new” condition, it will hold its resale value longer than one that is worse for wear.
How to Calculate Car Depreciation
There is an easy formula you can use to evaluate how much your car has depreciated. First, find your car’s fair market value starting today. You can find an estimate by using a car value calculator online. Then subtract that number from the purchase price. Remember to take out any sales tax or other fees. You just want the vehicle’s actual cost.
There are also programs online that will calculate this for you. Many are free to use. However, remember that this is only an estimate. It is challenging to provide an accurate figure with the basic algorithm that a car value calculator uses.
It’s also helpful to check used car dealers’ online inventory to see how much they’ve priced your model or a similar one. Checking the value of older versions of your car will also give you an idea of how much your vehicle will be worth on the road.
How to reduce the impact of car depreciation
Depreciation can be very expensive when it’s time to sell or trade in your car. However, there are some steps you can take to help reduce the impact of depreciation, such as:
Buy a car with a high resale value
Consider shopping for cars with high resale values. With a little research, you can uncover vehicles in a number of categories, from sedans to work trucks, that have outstanding resale values. Vehicles with a high fuel economy rating also retain their value, as do cars painted in classic colors such as black, silver and white.
Have it serviced regularly
Car depreciation rates are directly linked to the car’s overall condition. Whether it’s mechanical problems, internal wear or its exterior appearance, the more you do to keep it looking new, the longer it will retain its value.
Make sure it is serviced regularly by a certified technician, and keep it in good condition, inside and out. Consider having it professionally detailed once a month if it’s in your budget. Providing it with diligent care can be a good investment when you decide to sell it.
Avoid modifications
While those aftermarket modifications look great to you, they can adversely affect your car’s value. Avoid paying additional depreciation by saying no to options like spoilers and flared wheel arches. Modifications not only lower your car’s value, but they will also drastically limit your number of potential buyers.
Consider your travel alternatives
Because high mileage can mean more vehicle depreciation, always keep an eye on the odometer. Consider joining the carpool group at work or taking public transportation.
If you must travel for vacation, consider flying instead of taking a road trip. You can preserve your car’s value by making the journey in the air.
Timing is everything
If you want to learn how to estimate depreciation because you’re ready to sell your car, make sure you choose the right time of year. For example, list your convertibles during the summer to ensure a high purchase price.
On the other hand, if you have an SUV with four-wheel drive power, wait until the snow flies to advertise it. Winter may be the best time to get top dollar from your buyer, so you pay less in vehicle depreciation.
Car depreciation for tax purposes
You may also be able to deduct your car’s depreciation on your tax return. There are several methods accountants use to evaluate the type of depreciation, including:
- MACRS depreciation: The vehicle’s cost is spread over five years, with higher deductions taken in the first few years.
- Section 179 deduction: Owners can deduct $25,000 for a business-related truck or SUV during the first year.
- Special depreciation allowance: The maximum deduction is $18,000 for the first year using this method as well and only for the car you use for business.
No matter which method you choose, learning how to determine vehicle depreciation with our beginner’s guide can save you money.
Whether you buy a new or used car, it affects every vehicle. If you want more than an estimate of your car’s lost value, use a car value calculator or consider hiring a tax professional.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years of experience covering personal finance and insurance. She has extensive knowledge of various lines of insurance, including auto insurance and property insurance. Her byline has appeared in dozens of online finance publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.
