What is Depreciation for Cars?
Depreciation for cars means a reduction in the value of the cars over the period of its life; the depreciation rate is very high for new cars and may be different for each model as well. In the first year, a car may suffer a decrease of about 10 percent, and the decrease in value increase year by year. On an average, most of the value of the car is lost in a period of five years and a nominal scrap value is left.
Car Depreciation Rate Table
Let us have a look at a rate of depreciation table for a car whose details are as follows:
Purchase Value = $40,000
Estimated years after which car will be sold = 5 years
Refer to the following table –
Thus, the value of the car after a period of five years is expected to be $15,222.68.
How to Calculate Depreciation for Cars?
Depreciation on a car can be calculated on the following formula:
A = P * (1 – R / 100)n
D = P – A
- A = Value of the car after a period or n number of years
- P = Purchase value of a car
- R = Rate of depreciation
- N = number of years after the purchase of the car
- D = Depreciation
Let us understand the calculation by way of the following example.
A car depreciates at a rate of 15% per annum. The car is purchased for $30,000. What will be the value of the car after a period of four years?
Calculate the value of a car after 4 years:
Value of car after 4 years is A = $15,660.19
Now Calculate the depreciation after 4 years:
- = $30,000 – $15,660.19
- = $14,339.81
Factors Affecting Car Depreciation
- A number of ownerships: The greater the number of previous ownerships, the greater is the rate of depreciation. Thus, it is always advisable to check for previous owners in case you plan to buy a used car.
- Mileage: A car with higher mileage will lower down the value of your car and the resale value will be less.
- Service and Maintenance: The value of a car will be better if the same is well maintained and service is done timely.
- Warranty: A car with a longer length of warranty will attract more resale value.
- Popularity: If a car is popular and is desired by people for a longer period of time, then the resale of the car will be more as compared to those cars with go out of demand in a time period of few years.
- Car size: The cost of running is more in the case of luxury cars or big cars and hence, they depreciate faster than smaller cars.
- Maintenance: If the cars are not maintained regularly then the cars will tend to depreciate faster.
- Condition of Car: The car which has been damaged due to accident or any other reason, its value will start to diminish.
Depreciation rates may differ for various models and types of cars. Also, the rate at which a car depreciates depends on various factors as described above. Further, the value of the car is reduced starting from the first day of purchase, and such reduction keeps to continue over its life.
This has been a guide to what is depreciation for cars. Here we discuss how to calculate car depreciation and its rate along with examples and factors affecting it. You may learn more about financing from the following articles –