What is Depreciation?

What is Depreciation?

Depreciation is the difference between the amount you spend when you buy a car and the amount you get back when you sell or trade it in. It’s often overlooked or ignored when buying a car, however, it is important to understand the value of the asset you buy today versus the value in the future.

Look below for some helpful information on car depreciation you should be aware of before making your next car purchase.

How does car depreciation work?

The AA believes that most cars lose between 50% and 60% of their value in the first three years of ownership. The rate of depreciation is dependent on various factors, which fall into three categories: price, running costs and quality – both perceived and actual. By the time you’ve reached the eighth year of ownership, depreciation reaches a standstill.

How does depreciation work?

According to research by CAP Automotive, depreciation will cost the typical motorist three times as much as they spend at the petrol pump. CAP Automotive say that choosing a car that holds its value well delivers much bigger savings over time than focusing on fuel efficiency.

One way of calculating depreciation is using the ‘straight line’ method. This is when you are calculating the rate of depreciation by splitting the cost of the car by the number of years that it is likely to last.

To use the straight-line depreciation calculation process, you’ll need to know the car’s:

  • Purchase price
  • Resale value (what it’s likely to be worth when you sell it)
  • Estimated lifetime.

You can then calculate the car’s depreciation for each year by dividing its purchase price by its approximate lifetime.

Looking for an additional way to calculate depreciation to compare with the above method? You could also use the ‘declining balance depreciation’ method. This estimates depreciation by multiplying the initial cost of the car by a percentage that declines each year. The percentage used for calculating depreciation will vary depending on how long you expect the car to last, so again you will need to estimate the car’s expected lifetime which can be hard to do but a rough estimate should be ok to use.

Top 10 Cars that hold their value

We Buy Any Car believes the below car makes are renowned for having slower rates of depreciation compared with others in the market.

  • Land Rover
  • Toyota
  • Porsche
  • Volkswagen
  • Range Rover
  • Lotus
  • Lexus
  • MG
  • Mitsubishi
  • Jaguar

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