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How does car depreciation work?

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What is car depreciation?

New cars hold an attraction in their shiny wheels, glossy paint and signature smell, yet the moment you get behind the wheel and make that first exciting journey from the dealership to home, you’re losing money.

Car depreciation refers to the difference in car value between the point of purchase and the point at which you want to sell it. Quite simply, car depreciation is a decrease in value over time. Depending on the make and model, a new car can depreciate anywhere between 10% – 15% once you drive it off the dealership lot.

It doesn’t matter if you intend to sell it in a year, a decade from now, or whether you’re unloading it privately or trading it in to a dealership, depreciation will always play its part in the life of a car, shrinking your profit margin. While it's hard to stop your vehicle from depreciating, there are certain steps you can take to slow it down and maximise its resale value.

What factors influence car depreciation?

Depreciation for Australian vehicles is influenced by several factors including the car’s age, physical and mechanical condition, kilometres travelled, transmission and manufacturer or specific model’s reputation.

Age

Ultimately the older a car is, the less value it has. Cars with typical depreciation rates may lose up to 58% of their value in three years, 49% in four years and 40% in five years.

Car manufacturers are bringing out new models and lifecycle updates at ever-increasing rates, with previous versions becoming out of date faster than ever. That’s why it’s so important to choose new car purchases wisely and look after your vehicle well while you own it, to get the maximum price possible when you’re ready to sell.

Physical and mechanical condition

Generally the better maintained the vehicle, the higher resale value it will attain. This goes for all consumer products but there are many items that are unique to vehicles such as servicing records, history of accidents and number of owners.

Kilometres

Cars have a built-in record of their usage history through the odometer. The impact of high kilometres upon a car’s value can depend on the brand as well as the fuel type, however generally the more kilometres a car racks up, the more it depreciates.

Transmission

The stop-start nature of driving throughout Australian capitals, means many Australians prefer automatic vehicles over manual. Manual cars have long been regarded to be lower in value than automatic vehicles as manual transmissions are easier to maintain.

Fuel economy

In an age where concern about climate change, environmental impact and carbon emissions is at an all-time high, fuel efficiency increases a car’s appeal. The classic gas-guzzling V8 engines of yesteryear are largely becoming collector’s items as opposed to everyday vehicles, replaced by smaller four-cylinder or hybrid options with excellent fuel economy. Choosing a fuel-friendly car can give you the edge when you’re ready to sell down the track.

Manufacturer’s model or reputation

A brand-new car manufacturer entering the market may find that their vehicles depreciate rapidly because they are perceived to be an ‘unknown’, having not been tried and tested in Australian conditions. Emerging Chinese brands have suffered from this factor in recent years, having failed to tune their vehicles to the ins and outs of Australian roads. On the flipside, a car manufacturer exiting the market may spook owners and potential buyers if they fear not having warranty or customer support moving forward. Most recently this was seen with Holden leaving the Australian market.

Spending $2,500 less on a competitor’s lessor known car may be considered a bargain, only for that model to lose its value twice as quickly. Typically manufacturers like Toyota, Mazda, Hyundai, Kia are more likely to prompt lesser depreciation values, given their perceived quality, running costs and access to mechanical parts.

Calculating vehicle depreciation

To calculate depreciation:

Calculate the difference between the new car value from the approximate resale value, using sites such as RedBook as a price guide. Divide the difference in values, by the new car value, then multiply by 100.

For example a $20,000 car - $12,000 resale value = $8,000 loss of value.

Then, ($8,000/$20,000) x 100 = 40% depreciation.

Vehicle depreciation for tax purposes

You may not be able to claim depreciation on your car as an owner-occupier, however as a business owner, you can claim a tax deduction for vehicle expenses used in running your business.

Many car owners forget to include depreciation when they’re adding up their annual car expenses at tax time. If the car is registered to a business, the Australian Tax Office (ATO) permits the business to depreciate their vehicle according to a specified car depreciation rate over a 5-year period.

There is a limit on the cost you can use to work out the depreciation of business vehicles. The maximum value you can use for calculating your claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car. The limit for the 2021–22 financial year for business purposes is $60,733.

Depreciation and car loans

Depending on the type of vehicle you buy and the state of your car as highlighted through the factors above, your car very well might depreciate at a much faster rate than the principal balance of the car loan. When this happens, you inevitably come to a point where you owe more money to the bank than your car is actually worth.

There are many factors that can cause such a situation to arise including a lack of trade-in, high interest rates and simply paying overs for a specific type of a vehicle. In most cases, people will make very little or even no down payment at the time of purchase, choosing to finance the entire amount (or close to it) of the vehicle purchase, taxes, licensing and registration.

It’s important to ensure that when choosing a car and a car loan, you search the market before eventually settling on a reliable make and model that will depreciate on par with the rate at which you make car loan repayments.

If you are in the market for a new car, check out our range of car loans with some of the lowest rates in market.

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About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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