Depreciation Rate on Second-Hand Cars: What is It and How It is Calculated?

What is the Depreciation Rate on Second-Hand Cars?

Depreciation is a phenomenon where the car loses its value over the course of ownership. In simple words, depreciation is the difference between the amount you paid while buying the car and the amount you get while selling the car. Now, the rate of depreciation for used cars depends on the number of years they are used. For instance, the depreciation rate for a 2-year-old car will be less than a car used for 5 years.

Hence, the older the car, the higher the rate of depreciation. For example, if you are in the used car market, a 5-year-old car’s price will be lower. compared to a 3-year-old used car. That’s because a car used for 5 years has a higher depreciation rate than a vehicle used for 3 years.

So, how is the depreciation rate for used cars determined? We will answer this exact question in the following sections of this article.

How is the Depreciation Rate Calculated

The rate of depreciation on used cars can be calculated using several methods. In this section, let’s take a look at the different methods used to determine the depreciation rate of a used car.

Formula to Calculate Depreciation Percentage Rate for Cars

The easiest way to calculate depreciation for cars is by utilising the IDV (Insured Declared Value) calculators available online. Insurance companies make use of IDV calculators to determine the current value of the vehicle. The tool instantly calculates the worth of your car after accounting for depreciation. The tool uses various parameters to calculate the car’s value, including the standard depreciation rate for cars determined by IRDAI (Insurance Regulatory and Development Authority).

The tool is easy to use. All you need to do is enter the vehicle registration number, make, model, variant, year of manufacture, year of registration and location to find the worth of your pre-owned car.

Depreciation Rate for Cars

Apart from IDV calculators, you can also calculate the car depreciation rate using two formulas, which are mentioned below.

• Diminishing Value 

• Prime Cost

Here is the formula to calculate the car depreciation rate using the diminishing value method. Note that the depreciation rate is calculated by accounting for the car’s base value.

Car’s Purchase Value x (Number of Car Ownership Days ÷ 365) x (Car’s Effective Life in Years ÷ 200%)

Here is the formula to calculate the car depreciation rate using the prime cost method. Note that the depreciation rate is calculated as a particular percentage of the car’s total cost.

Car’s Running Cost x (Number of Car Ownership Days ÷ 365) x (100% ÷ Car’s Effective Life in Years)

Factors Affecting the Depreciation Rate on Used Cars

There are several factors that affect the depreciation rate of a car. We have highlighted a few important factors in the points below.

• Car Make/Model: A premium or luxury car model has a higher depreciation rate compared to an entry-level or mass-market car. The reason for that is the spare parts and maintenance costs of a luxury car are on the higher side.

• Car’s Age: The depreciation rate of a car keeps increasing as the car gets older. That’s because the vehicle’s physical and mechanical condition deteriorates as it gets older.

• Car Ownership History: A single-owner used car will have a higher resale value than a second or third-owner car. The depreciation value will also be lower for a car with fewer owners.

• Physical and Mechanical Condition: A well-maintained and regularly serviced car has a lower depreciation rate compared to a car with issues like exterior damage, mechanical niggles, etc.

How to Reduce Depreciation Rate on Used Cars

You can resort to a few measures to reduce the rate of depreciation on used cars and get a higher resale value. Here are some measures you can take to reduce the depreciation rate.

• Proper Maintenance: If your car is well maintained and has a clean service history, it can fetch a higher resale value. Cars with proper service history and in immaculate condition attract a lower depreciation rate. On top of that, avoid any modifications to the car as it can reduce the resale value.

• Go for Cars with High Resale Value: When you purchase a car, look for brands or models which can fetch a higher resale value. Also, avoid buying a make or model that may be discontinued in the near future. 

Frequently Asked Questions

Disclaimer: The above content is for informational purposes only. It is recommended to take the help of an expert before making a decision.