Like the smell of fresh leather as you place yourself immaculately on the seats of a brand new car?
When buying a car, many have talked about how cars are a depreciating asset, and thus making one expensive asset to own. Whether you’re buying a new vehicle or selling an almost 10 year old one, there is no escaping the troughs of having to understand and navigate the waters of depreciation, and what it means for you.
What is Car Depreciation?
Simply put, a car’s depreciation is the amount that you have used over a period of time.
For a layman dipping their toes into the car ownership or car rental market, understanding the car’s depreciation costs allows for you to better calculate the actual financial cost of the car to be more well informed about your purchasing decisions.
To calculate it, and to get an idea on how much your car has depreciated over the years,
Annual Depreciation Cost = (Purchase Price – Paper Value) / Years Left In COE
That is, if you bought a car at $80,000 and sold the car at $40,000 some years later, the depreciation cost is $40,000!
However, it is commonly known that depreciation is not consistent throughout your car’s 10-year lifespan. In general, the depreciation of the car is at its highest for the first 3 years of the car’s life, where the car may depreciate by more than 20% in the first one year. Thereafter, the vehicle depreciates at a rate of about 10% per year for the next four years, which is a rather stark difference considering that other asset classes like housing and investments, that generally appreciate in value upon purchase.
Why Do Cars Depreciate in Value?
1. Wear and Tear
Car prices depreciate due to the inevitable wear and tear. More mileage may lead to more wear and tear, which then causes a drop in the quality of the car which will be taken into consideration when calculating depreciation. Moreover, the more reliable a car is, the lower the depreciation as the vehicle is said to withstand the test of time. Hence, having regular maintenance of your car would reduce its depreciation value, and car owners may be able to sell the car at a higher price.
2. The “Not-The-Latest” Gadget Syndrome
Bought an iPhone and a few months later, a newer model comes out, with better features – more efficient CPU, and quality of the apps. Well, it’s almost the same for cars. The originality of the newest in the market would throw the hammer into the works, depreciating the value of your car.
3. The Recency Effect
The once broken, considered sold ideology; or rather, in this case, once sat in, considered old. Finances aside, few or far in between would opt for a second hand car, simply due to the fact that it was once owned and used, not fresh from the oven. The resale value of the car that you have just bought (perhaps a month ago), will not be as high as one that has just freshly been out of the oven.
4. Different Models Depreciate Differently
Generally, luxury models from premium brands depreciate more aggressively than their more affordable counterparts as luxury models typically have various technological advancements and specs that second-hand buyers may not be able to appreciate as much. According to a research by CarVertical in May 2022, which analyzed over 72 million data units between 2019 and 2022 in the US, Europe, and Australia, Porsche, Jeep, Mini, Land Rover and Jaguar are the top 5 models that depreciate the least; while Chrysler, Audi, Seat, Škoda and Infiniti depreciate the most.
Do I Have To Consider Depreciation Costs For Car Rental?
For car rental customers, fret not as the car rental companies have incurred these costs for you, with prices spreaded out and subsumed into the operating costs. With a fixed rate, car rental customers get to enjoy the utilization of the car. For long term car rental, rental prices would stay consistent as to what has been communicated to you before signing the lease. For customers considering buying a car for a 5 year usage, only to bear the brunt of the car’s steep depreciation especially in the first few years, having a long term car rental with a 5-yr lease instead may be an ideal avenue of consideration. With that being said, whether it is a 1 or 5 year lease, you’ll be able to enjoy the perks of the car at a fixed price, irrespective of COE, depreciation and other hidden costs that car owners may need to fret on.