New cars lose value from the day you take ownership. What may surprise you is the rate at which the value drops or depreciates. Additionally the rate of depreciation varies with the make and model of a vehicle, but there are some factors that can reduce this. Vehicle depreciation not only reduces its future value, but will also impact car finance rates, so buying a vehicle with a high depreciation will impact your monthly payments and any termination fees.
So how do you calculate depreciation?
There are two main methods used to calculate vehicle depreciation. Both methods use the cost of the vehicle including any meant spend on transportation eg, interstate shipping, registration and maintenance.
Prime cost method.
Calculates a vehicles drop in value as a fixed percentage, leading to a uniformed drop over the lifetime of the vehicle.
Cost X Time X (100% / effective life in years ) = Lost value
Diminishing value method
Is perhaps a more realistic estimate of a vehicles value giving a higher level of depreciation in the early years.
Cost x Time x (200% / effective life in years) = Lost value
The following example is for a vehicle worth $50,000 when purchased with an effective life of 15 years. The graph shows losses for each year for both methods.