Car Depreciation Explained

As far as large purchases go, a car, for most people, is typically second only to a house. But unlike a house, a car is a depreciating item. This has given rise to a famous and well-worn sentence which states that your new car starts losing value the moment you drive it off the dealership lot. 

But all is not lost. While it’s impossible to prevent car depreciation, there are actions you can take to slow your car’s depreciation and in turn, maximise its resale value.

It’s important that you know how to calculate car depreciation to make an informed decision when buying or selling a car. In this article, we’ll cover everything you need to know about car depreciation including factors that affect depreciation and how to calculate car depreciation. If you’re currently in the market for a new car,  we also outline practical tips to reduce your car depreciation, placing special emphasis on vehicle selection and purchase price (hint: you want to negotiate the lowest price possible).

What is Car Depreciation?

Car depreciation refers to the difference in car value between the point of purchase and the point at which you want to sell it. In simple terms, it is a decrease in value over time. Depending on the make and model, anywhere between 10% – 15% of a new car’s value disappears once you drive it off the dealership lot. A further loss of 10-15% can be observed by the end of the first year, making it the steepest period of loss on the depreciation curve.

Aside from the loss in value from wear and tear as a durable good, new models, with better features and equipment are released every 3-6 years by automakers. These newer models have increasingly shorter product life cycles, and each time a refresh is released, the previous models are immediately outdated. This tends to accelerate depreciation even further.

What Factors Influence Car Depreciation?

Depreciation is the single largest cost of car ownership in Australia. 

A car with a typical rate of depreciation loses up to 58% of its initial value after three years, 49% in four years and 40% after five years. Certain vehicle types and models can have close to zero value after 10 to 11 years. That’s why car owners prefer in-demand cars that retain higher resale values.

The factors that influence car depreciation include:

• Age of the car –  The older a car is, the less value it has. The physical appearance and mileage of a vehicle are used to calculate its age.
• Fuel efficiency –  Fuel-efficient cars are cost effective and have more long-term resale value.
• Make and model –  Car brands like Toyota, Mazda, Ford and Honda are popular choices in Australia. SUV models are especially in high demand, which increases their market value.
• Quality of maintenance – The better maintained a car is, the slower its depreciation will be, especially if records of its maintenance are available as proof.
• Condition of the vehicle’s interior and exterior – Modifications such as tints, leather interior and a surround sound audio could improve a car’s value.

Both objective quality and perceived quality impact the market value of a car, and thus, the rate of depreciation. Quality refers to the car’s reliability and brand perception. For instance, according to a comprehensive study by insurer RACQ the depreciation cost of a Hyundai Tuscon Elite (AWD) 1.6L is $90.85 per week while a Toyota RAV4 GX (AWD) 2.5L is only $78.27 per week. That’s a 14% difference!

Depreciation of Private Vehicles

According to insurer RACQ, the weekly depreciation of some popular vehicle makes and models in Australia is as follows:

Depreciation of Work-Related Motor Vehicles

Individuals who use their vehicles for business can reclaim a percentage of the depreciation against their tax. The ATO allows Australians to depreciate their vehicle according to a set schedule over 5 years if the vehicle is registered under a business.

Car depreciation for tax purposes is claimable when the vehicle has been used to generate taxable income.

To calculate the car depreciation rate, use the Commissioner’s estimate or self-assess the effective life of the vehicle. The effective life estimate depends on the type of vehicle and how it was used.

There is a car depreciation limit when calculating the depreciation cost of a work-related car. The limit is updated every year. The figure for 2018-19 is $57,581.

How to Calculate Car Depreciation

Most car depreciation calculators use the prime cost method or the diminishing value method. Regardless of the method, the calculation involves the cost of the vehicle, which covers the amount paid upon purchase and any additional money spent on transportation, registration and maintenance of the vehicle.

Both car depreciation calculation methods share the following elements:

• Number of days held
• Cost or base value of the vehicle
• The effective life of the vehicle

The prime cost method calculates the vehicle’s drop in value as a fixed percentage of its cost. The result is a uniform drop in value as time passes. The formula for the prime cost method is:

Asset’s Cost x (Days owned ÷ 365) x (100% ÷ Effective life in years) = Lost Value

The diminishing value method uses the car’s base value to calculate depreciation. Base value includes its initial purchase cost and other costs incurred on the car since purchase. The formula for the calculation is:

Base Value x (Days owned ÷ 365) x (150% ÷ Effective life in years)

This formula is for vehicles acquired prior to May 10, 2006. For vehicles acquired after May 10, 2006, the formula is:

Base Value x (Days owned ÷ 365) x (200% ÷ Effective life in years)

How to Reduce Car Depreciation

Choose carefully

Studies show that Australians prefer automatic transmission vehicles to manual ones. They also prefer cars with a white, black, red or silver paint job, and popular brands such as Toyota, Honda and Mazda.

If you want a car with a slower depreciation and high resale value, choose a car that future prospective buyers are likely to be more interested in. We understand that not everyone is an expert when it comes to cars and their future value, that’s why we provide free vehicle selection advice to our users when they are in the market for a new car. We can advise you on which cars will hold their value better than others over. 

Buy carefully and negotiate shrewdly

Selecting the right make, model and variant is only the first step. In order to minimise the pain when you go to sell or trade in your car in years to come, it’s vital to ensure that you have not overpaid for your car in the first instance. With CarChase, you can take advantage of our extensive dealer network and data-driven approach to pricing to land yourself the best possible deal when buying a new car, saving yourself thousands from the recommended retail price (RRP).  You won’t need to worry about putting yourself in the uncomfortable position of a high-pressure negotiation because it will all be handled for you.

Use carefully

Keeping the car in great condition is just as important as buying the right car. The fewer knocks and damages a vehicle suffers, the slower its depreciation will be.

Consider a nearly-new or hardly used car

Minimise depreciation by buying a used car that’s already past its initial major value drop. For example, a car that’s used for three years or less would have experienced its initial sharp drop in value. Buying such a car saves money on the purchase price whilst retaining most of its value for the next three to four years. You can sell the vehicle without losing much value to depreciation, especially if you’ve kept the car in excellent condition.

Regular cleaning and maintenance

Keeping a car clean and properly maintained minimises its rate of depreciation and maintains its market resale value. It services a very useful purpose of being more attractive to potential buyers. Scheduled maintenance and servicing also minimise wear to the engine, tyres and more.

CarChase offers a convenient car maintenance service. We can help you with mechanical repairs, car detailing, cosmetic repairs and log book servicing. Simply tell us more about the repair service you need and we’ll provide you with a competitive quote.

Minimise Mileage

The more mileage a car racks up, the more it depreciates. If you intend to maintain the market value of your car, avoid frequent long distances trips. According to the Department of Transportation, the average annual mileage for a car is 13,500. Going beyond this figure could significantly impact the vehicle’s future resale price.

Best resale value cars i.e slowest depreciating cars

By choosing a car with a slower depreciation rate, you can save yourself a lot of money in the long run. You also increase your chances of reselling the car at a good price. The higher-cost equivalent of cars in most cases depreciate less than their base-models.

Below are popular car types and models in Australia that depreciate the least:

• Toyota Corolla: There is a high demand in Australia for new and used Corollas. The steady demand and the vehicle’s reliability contribute to its minimal depreciation of 27% – 36% after three years.
• Mazda 3: Another popular choice in Australia with a depreciation of 31% – 39% after three years.
• Honda CR-V: SUVs are becoming increasingly popular in Australia, which has contributed to the CR-Vs 31% – 39% depreciation after three years.
• Mazda 2: With a depreciation rate of 27% – 36% after three years, this is one of the most cost-effective cars you can own in Australia.

Conclusion

If you’re buying a new car or a used car, knowing your car’s potential depreciation value helps you choose a car with high resale value. Confused about how this works? CarChase experts will help you choose a car that fits your budget, intended use and long-term goals.