Car depreciation refers to the decline in the value of a car over time, this can be seen by comparing the price of the car when it was first purchased and its current price. Depreciation is one of the main factors that impact the selling price of a used car. Vehicles are among the consumer goods which we buy and sell, and their prices depreciate over time, regardless of who buys them. It doesn't matter if it is a vehicle for private use, for a company, or for public use; in any case, depreciation occurs. Here, we will focus on depreciation for private-use vehicles.
Next, we will explain what factors you must consider to understand the depreciation of an automobile in the car market, and because of these factors, this is not something static and can change over time.
What is depreciation, and how does it affect the selling price of a car?
Depreciation is the decrease in the value of a car for multiple reasons over time. The leading cause of car depreciation is related to the age of the vehicle at the time of sale. Let's see a practical example to understand how car prices decrease. For example, You buy a vehicle for 40,000 AED. Once you have taken it out of the dealership, it is not a new car anymore, and automatically, its value is reduced by an average of 10%, the vehicle has lost 4,000 AED of its value just by changing its condition from new to used, and now the car has a price of 36,000 AED, 4.000 AED less than the purchased price. If, after a year of regular use, you want to sell the vehicle, you will not be able to sell it for 36,000 AED because most cars, in the first year, depreciate between 20% and 30% (some factors generate this range), you can likely obtain between 32,000 AED and 28,000 AED.
In the course of a year, the car depreciates by 10% of its value just by signing the purchase papers and taking the car out of the dealership, and then, by the end of the year, it has lost another 10% of its value, now the vehicle can be sold at 20% less than its initial value when it was brand new.
Different factors can be considered in the depreciation of a vehicle's value. The average value of a car depends on the moderate use of the vehicle, known as "natural wear and tear" However, this doesn't mean that the value cannot vary; there are other factors that can affect car prices, elements such as the type of use, the kind of maintenance and service history, engine condition and fuel consumption after five years.
Car depreciation basics
The first starting point when depreciation begins is when a car leaves the dealership. Depreciation is an accumulated effect that occurs year after year. The car's age affects its resale value (selling a used car). Price reduces year after year as previously mentioned. Depreciation is an exponentially decreasing curve. In general, the impact of depreciation is evaluated over a five-year period, this duration is known as the period in which a car experiences the highest amount of usage. Due to this effect, the car's resale value is drastically reduced in the first three years, where it can lose up to 40% of the initial value. During the first five years, the cumulative loss in value due to depreciation is approximately 60%. The resale value reduction effect slows significantly after the ninth or tenth year, almost zero in the automotive market. There are three types of depreciation effects, which can be called High, Medium (general or average), and Low, where there will be variations in their percentages. It is crucial to remember that depreciation is not necessarily constant; However, percentage values are generally "constant" and consecutive from year to year; different conditions can affect or accelerate a vehicle's depreciation and increase or reduce the percentages.
Some factors can affect, modify or even eliminate this effect in a vehicle, such as changes in the market demand, demanded features in a car, or that the car has belonged to a famous person. Instead of being reduced, its value can increase because the vehicle has an added and unique non-tangible value.
It is essential to bear in mind that there are cases where a new vehicle with zero kilometers has lost its value. The reason can be that model was launched many years ago, and this factor reduces its resale value. Therefore, we must consider this as a factor that affects the base price from which we start to calculate the depreciation of a vehicle.
Percentages of loss in value year over year due to average depreciation on cars
As we mentioned before, the effects are calculated over a time period of five years, but you should keep in mind that there are cases where the extent of the decrease in the percentage of the resale value may be higher or lower due to different factors. But we will show the general percentages below:
First minute – 10% less on your purchase value
The first year of use – 20% less than its purchase value
The second year of service – 30% less than its purchase value
The third year of service – 40% less than its purchase value
The fourth year of use - 50% less than its purchase value
The fifth year of use - 60% less than its purchase value
The sixth year of use - 70% less than its purchase value
The seventh year of use - 74% less than its purchase value
The eighth year of use - 78% less than its purchase value
9th year of use - 80% less than its purchase value
Percentages of loss in value year over year due to the effect of high depreciation on cars
First minute – 10% less on your purchase value
The first year of use – 35% less than its purchase value
The second year of use – 50% less than its purchase value
The third year of use – 60% less than its purchase value
The fourth year of use - 70% less than its purchase value
The fifth year of use - 75% less than its purchase value
The sixth year of use - 80% less than its purchase value
The seventh year of use - 85% less than its purchase value
The eighth year of use - 88% less than its purchase value
9th year of use - 91% less than its purchase value
As presented above, the difference between the high and average percentile depreciation rates is observed to be quite significant in the second year. There is a difference of 20% greater loss than in other years.
It is also essential to remember that in some cases, from the tenth or eleventh year (10 or 11), the depreciation of the car's value will be zero.
What should you take into account when using an online depreciation calculator?
As we have already mentioned and referred to in the previous sections, there are three types of depreciation effects, High, Medium, and Low. In general, simple calculators use the average (mean) depreciation rate.
The use of the calculator for this type of case tends to be simple, they will only ask you the price of the car when you first purchased it, and then you must enter the purchase date of the vehicle (when it was new), in this way, the calculator will give you a value.
What to do if the car is used?
You can find the buying price of the new car and the year it was bought in the vehicle transfer papers. With this data, you can calculate the depreciation caused in your vehicle at the current time. If you don't have it for some reason, you can search through Google for data on the model of the car, where you will find its price and the year of release of that model.
In the same way, it is recommended that you look for the average price during the first two years of the model's launch, but it is vital that you do so by taking into account the country in which you are located; remember that the market can vary depending on the country and also depending on its specifications, for example when it is a G.C.C. specification vehicle such as those sold in Dubai and the U.A.E, depreciation will be lower as compared to non-GCC cars.
More detailed depreciation calculators could ask you for more specific data and give you much more specific depreciation values. Remember that If you are in Dubai but are using a calculator from a website in the United States, Germany, or the United Kingdom, the values provided by the calculator may vary due to different locations.
Factors Affecting Depreciation
As we have already mentioned, different factors can affect the value of vehicles that cause depreciation at "different speeds" depending on the type of vehicle or their demand in their country.
In the automobile market, it is pretty standard for cars that are considered to be of better quality or more reliable to have lower levels of depreciation; for example, this happens with specific make and model cars; some of the best-known in this market are the Nissan Frontier and the Toyota Tacoma, these two models in various countries in 2020 show that they have lower depreciation levels overall because they are considered more reliable than other models, even if other models are also 4x4 (4x4 models tend to have lower depreciation levels)
Ten vehicles that hold their value in 2020.
The other example is luxury sports cars, where depreciation tends to be faster and higher. It would seem to be a bit contradictory because they are high-end cars of excellent quality, parts, and reputation, and powerful and renowned brands in the market. However, this type of car has a very segmented market because the vast majority of potential consumers want the newest model of a luxury sports car brand and hardly want to buy a used car unless it is a very rare model or unique with a high reputation, in this case, the value may increase rather than decrease.
If we were to talk about the other extreme, a natural factor would be that the car has been "withdrawn from the market". In this case, such model cars that are still running or are being sold as used cars tend to have a much higher depreciation almost instantaneously.
When there is a change in the economy in a country, such as an economic depression that affects a country or region, this can cause new vehicles to depreciate rapidly due to low demand so that they can be purchased at an even lower price between 20% or 30%
The popularity of the model
In the market, psychology plays an important role. When a vehicle has gained a reputation among a specific segment of the population, such cars can maintain their price even from one year to the next; it is common to find car models that may have a better reputation and reliability due to their certain features for specific regions, for example, 4x4 cars for extreme environmental areas such as deserts and gulf countries. Their price depreciation is lower as compared to other models.
Which cars depreciate less?
Talking about which cars depreciate at a lower rate can be somewhat subjective. It is important to remember that depreciation can differ from country to country for makes and models.
To get an idea, we can keep in mind the following:
In Europe, in a survey of a consumer organization in 2015 based on the opinion of more than 30,000 European drivers, ten vehicle brands were listed as the most reliable (listed from most trustworthy to least reliable)
And in Germany, reliable cars were studied in 2015, other brands were listed among the best, and the ranking order was not the same.
But if we look at the 2018 reliability survey of more than 76,000 drivers from the same consumer organization that was surveyed in 2016, it evidently shows how reliability concepts about brands change over time.
We can also see the results of an automotive research company in California, E.E.U.U., the company named iSeeCars, which did a fairly extensive study.
Study - Cars that hold their value in the U.S.A. - 2018
analyzing more than 4.3 million new and used car sales to identify the depreciation levels in the car models in 5 years from 2013.
In this study in the United States, the depreciation value was around 50% of its initial value. Still, they identified that some vehicle models depreciated more quickly and significantly.
|iSeeCars Top 10 Vehicles With the Lowest Depreciation - U.S.A. 2018
||Average 5-Year Depreciation
||Jeep Wrangler Unlimited
||Chevrolet Silverado 1500
||GMC Sierra 1500
||Ram Ram Pickup 1500
|Average for All Vehicles
It can be evidently seen from a study carried out by iSeeCars, 4x4 vehicles obtained a lower average depreciation during five years, but keep in mind that the above applies to the United States; if the case were that we had to see this pattern reflect on the U.A.E. and Dubai, this study would have to consider the cars that were G.C.C. and those that were not, since the vehicles that are not G.C.C. would naturally have a much higher level of depreciation.
Now you have tools to make an informed decision about when to sell your car and when it is the best time to do it, taking into account one of the most critical factors and thus get the most out of its use, and then sell it when you no longer need it.
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