Depreciation is an important concept when it comes to used cars because it affects the value of a vehicle over time. If you are considering buying a used car, this article will help you understand depreciation and how it affects used car values.
What is Depreciation
Depreciation refers to the gradual loss of value over time due to wear and tear on a vehicle. For example, buying a brand-new car today and driving it off the lot will automatically lose about 10% of its value. Depreciation is the fastest for new vehicles.
The more miles you drive, the faster this depreciation process will occur as wear and tear take its toll on the tires, engine, transmission, and electrical systems. Several factors affect how much depreciation occurs and, consequently, the value of used cars:
• Driving habits (speed and distance covered daily)
• Make and model
• Paint color
• Climatic conditions
• Accident history
• Maintenance (oil changes)
• Fuel efficiency (miles per gallon)
• Configuration (drivetrain and transmission)
• Location of the owner
Used car dealerships are often filled with nearly pristine models. According to Global News, the demand for secondhand vehicles is still strong, with their values increasing by almost 50% between March 2021 and March 2022. The concept of depreciation can explain why used cars are more desirable even during tough economic times.
You Can Save Money If You Buy a Slightly Used Car
A car’s depreciation is most remarkable in its first year (generally 20%). It will have lost over 60% of its initial value by the fifth year. You can expect it to lose about 15-20% each subsequent year.
If you can’t afford a new model and want to get the most out of your budget, shop for gently used cars in Calgary that are at least one year old. You could save 50% of the original price by purchasing a vehicle used for 2-4 years.
Some vehicles resell at a lower value due to other market forces, despite being in their pristine conditions. Also, some less popular car colors hold value better because there are scarce and in high demand.
Calculating Depreciation for Used Cars
Suppose the manufacturer’s suggested retail price for a particular model is $30,000. At the end of its first year on the road, assuming a depreciation of 20%, the value will depreciate by:
20% x 30,000 = $6,000
The value comes down to $24,000
Depreciation after two years: (Assuming 17.5%)
17.5% x 24,000 = $4,200
The resulting value will be $19,800
Depreciation after three years
17.5% x 19,800 = $3,465
Car value = $16,335
Depreciation after four years
17.5% x 16,335 = $2,859
Car value in its fourth year = $13,476
In used cars, values, age, and depreciation are critical factors. No vehicle is built to last forever, so it is only natural for it to degrade. To get the exact depreciation rate, use an online calculator which will factor in the age, car’s history, make, and model. Some calculators also consider the place of production.