How to Calculate Depreciation of Used Cars

Calculating the depreciation of used cars is a procedure for calculating the asset value during its usage period. Every car owner or company should understand this calculation to better comprehend the depreciation of the value or selling price of the car they own.

As we know, cars are one of the long-term assets that are likely to experience depreciation. What is depreciation anyway? 

Car depreciation is the difference between the price of the car when you buy it and when you sell it, also known as value reduction. That’s why when you want to buy a car, you should focus more on the potential depreciation of the car rather than how fuel-efficient it is or its engine performance. 

People who understand the concept of car value depreciation tend to choose to buy used cars. This is because new cars have a much higher potential for price depreciation. Thus, when the car is sold, the loss incurred will also be greater. 

In fact, the depreciation of a new car occurs as soon as the buyer leaves the showroom or car dealer, even within less than 5 minutes. When the car's wheels touch the asphalt for the first time, that’s when the car's price changes to wholesale price. This means that the exclusivity value of the car is gone. 

If you go back to the showroom or dealer and want to sell it to them again, the seller will not pay according to the amount of money you spent a while ago. 

Usually, the value of the car will drop by 15 to 20 percent in the first year. After that, the depreciation will slow down. However, the calculation of the depreciation value of used cars depends on several factors, such as; 

1. Car Brand 

The car brand is the main factor in how quickly or slowly the car's value depreciates. A well-known reputation and quality make the potential depreciation tend to be slower. 

2. Car Color 

Not many people realize this, but the color of the car can affect how quickly or slowly the car's potential depreciation occurs. It is highly recommended to choose a car with basic colors like black, white, and red, even if you don’t like them. Because if the car is to be sold, there will still be many interested buyers compared to other colors. 

3. Car Condition 

A well-maintained car, with a smooth body and not too high mileage, tends to have a higher resale value.  

4. Demand for Used Cars 

Cars released in limited editions usually have a high resale price. There are also quite a few interested buyers compared to regular cars. This greatly influences the main principle in the automotive market, which is supply and demand. 

Furthermore, in calculating the depreciation value of used cars, there are several methods, ranging from straight-line depreciation to double declining balance depreciation. However, in vehicles like cars, almost all car dealers have the same benchmark in calculating the depreciation value of cars. 

For new cars, the depreciation value is around 15-20 percent in the first year. Meanwhile, if you buy a used car, the depreciation value is only 10-15 percent. 

Then in the second year, the depreciation is in the range of 8-10 percent. The older the car, the smaller the depreciation will be. 

This minimal potential depreciation of used cars is considered an advantage of used cars. By buying a used car, you have a vehicle whose depreciation is not too significant.

Even though it’s called a used car, you don’t need to worry about its quality. Moreover, there are now many dealers and marketplaces that provide used cars in conditions that are not inferior to new cars. 

Many buyers have found used cars that are still in good condition regarding mileage, body, and engine, often referred to as "like new".

Read also: How to Negotiate for a Used Car

Author: Dinno Baskoro