Understanding Used Car Depreciation

Most people have heard a story about a car losing half its value the moment it is driven off the lot. While this is a bit of an exaggeration, cars do lose value over time. This is phenomena is known as depreciation.

Depreciation can be a confusing concept, but it makes sense when given a little thought. After all, the computer or phone you purchased five years ago surely isn’t worth the same amount now as it was then. The same logic applies to cars. Until they become “classic” or antiques, their value will continue to decline year after year. There are a few different factors that can affect car depreciation, and understanding them is essential to making informed financial decisions regarding your car.

First the Good News

auto loan used car

The good news is that the scenario described above doesn’t apply to used cars as much as new cars. This is because a car that has never had an owner is more likely to be in factory condition, and so won’t need repairs or service for a longer period of time. Moreover, there is a premium value to being the first person to own something. That’s why it costs less to buy a designer shirt at a second hand store than it does to buy the same shirt new from a department store.

The largest share of depreciation happens when a car goes from “new” to “used” so used cars will hold their value much better than new cars, experiencing less depreciation. This is part of the reason why you can frequently get lower interest rates on a used car auto loan, especially if your credit is good enough to qualify for the best used car loan. For example, the Kotak Mahindra Bank used car loan interest rate is frequently lower than that for a new car. A used car is simply less of a risk for the bank because it will not depreciate at the same rate.

Now the Bad News

None of this means that your used car won’t depreciate in value. Unless your used car is nearing 25 years old, at which point it is considered an antique and can gain value, it will be worth less when you sell it than when you bought it.

This does not mean that used are a bad value. However there are a number of things that can affect how quickly your used car depreciates.

Care

The first thing that affects depreciation is the level of care the car receives. The closer a car is to its factory condition, the more value it will hold. As a result, used cars that have torn interiors, scratches, scrapes, rust, or mechanical issues will lose value faster than used cars that are better maintained.

Mileage

Another factor affecting the depreciation of your used car is how many miles are on it. It’s no surprise that the more a car is driven, the greater the risk that something will go wrong. As a result, higher mileage cars will be worth less than the same car that has less mileage on it. This is why some people who wonder how to get a used car loan can become confused when the bank offers different interest rates on what, to them, seems like the exact same car.

Popularity

The final factor that can affect your car’s depreciation is its popularity. Popularity affects car depreciation in a couple of ways. First, a more popular car is more in demand, and basic economics tells us that when demand goes up and the supply stays the same, price goes up. Popularity also affects depreciation because it can determine how hard it is to find replacement parts for a car. Unpopular cars that go out of production are harder to find parts for, and when parts are available they are more expensive. Auto-buyers realize this and so they will not price a car with hard to find parts as high as a car that is easy and cheap to fix or maintain.

Conclusion

As you can see, there are a number of things that affect car depreciation. Thankfully, used cars don’t experience depreciation to the extent that new cars do because they’ve already had their biggest depreciation hit. Keep this in mind the next time you’re driving your car, and take care of it to ensure it holds as much value as possible.