Understanding depreciation

Your car’s value won’t be the same in five years. Even in two years, it will probably be worth a lot less than it is today.

This is called depreciation and it affects all cars to a greater or lesser degree. What it means is that you won’t be able to sell your car in a few years for the amount you paid for it – probably not even close!

Depreciation is an unfortunate part of car ownership and there’s no way to avoid it. However, there are factors that cause a car to depreciate faster or slower, and being aware of them can help reduce the effect of depreciation on your wallet.

Before you buy:

  • Some car makes and models depreciate faster than others so do your research to find a car that is likely to be worth more than similar cars in a few years’ time
  • Used cars may depreciate faster than new ones – if you buy a second-hand car you might not feel the effects of depreciation so much

While you own it:

  • Damage – if the car is damaged in an accident this is likely to reduce the resale value (Remember that legally you need to tell the seller about any problems you’re aware of)
  • How well it’s maintained – if the car hasn’t been serviced and taken care of properly this will also decrease the resale value

Depreciation and break-even point

At the same time as your car is depreciating, the amount you owe on it is also decreasing as you pay it off. Sometime during your finance period, the amount you owe will be roughly the same as what the car is worth – this is called the break-even point.

This calculation is important if you want to sell or trade in your car before the end of your finance contract. If you sell your car before break-even point then you’ll still owe more than it is worth, so you’re unlikely to get enough money to pay off your finance contract. But if you wait until after break-even point, you should be able to sell the car for enough to pay back the whole amount you owe. You obviously also have the option of paying off your car and keeping it – even though it’s still depreciating as time goes by, at least you won’t owe anything on it!

 
 

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