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How do I Calculate Auto Depreciation?

Mike Howells
Mike Howells

As the saying goes, the minute a new car is driven off a dealership lot, its value drops instantly by a fifth or more. While the actual amount may differ among brands and models, the general idea that an automobile depreciates in value drastically after purchase is true. In fact, auto depreciation makes up one of the key factors in the total cost of ownership for a car, along with its initial cost, taxes, fuel consumption, and cost of maintenance. As a result, calculating how much a car's value will drop over time is an essential part of the buying process.

There are a number of ways to calculate auto depreciation. The most common method is to find a reliable website that offers a depreciation calculator. By inputting the required variables such as brand, model, year, and trim level, it is possible to determine a reasonable estimate as to how much its value may go down over the years of ownership. This is also possible to do by hand, comparing prices from various dealerships and auctioneers, but the Internet has made it a much simpler and far more convenient proposition.

New cars depreciate in value quickly.
New cars depreciate in value quickly.

Auto depreciation is as much an art as a science, however. There are innumerable factors that can affect how a car depreciates over time, from external factors — such as the general state of the economy and the solvency of the particular car company — to more specific issues, like accident damage and wear-and-tear. Auto depreciation calculators do not take unpredictable events, such as accidents, into account, however, and instead merely use past performance of the brand and model to predict future value.

Interestingly, while cars initially depreciate a great deal, over time some select models begin to regain some of their initial value. In fact, a very small percentage of cars, in fact, can gain value over a long period of time, and wind up being worth far more than the were ever sold for at retail. The Volkswagen Beetle® for instance, was produced in North America and Europe from the 1950s to the 1970s. These models, in good condition, are worth far more in the 21st century than they ever were originally.

Auto depreciation is a big reason why pre-owned cars are so popular for cost-conscious buyers. A car that has just been returned from a lease, for instance, may only be worth a fraction of its initial price despite seeming new, having had regular maintenance and care throughout its brief life. As a result a savvy car-buyer may well determine that a used, nearly-new car makes a lot more financial sense than one direct from the factory floor.

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    • New cars depreciate in value quickly.
      By: Michael Shake
      New cars depreciate in value quickly.