Media post: How Cars Lose Their Value: Depreciation Difference Between New & Used Cars
Most car buyers think of a vehicle as a one-time expense, but few consider how much value it quietly loses each year. Depreciation plays a major role in what a car is truly worth after it leaves the showroom. Understanding how this gradual drop in value works can reshape the way one approaches car ownership and long-term costs.
In the changing automotive market of India, this understanding gets even more important. Due to the increasing new car prices and better availability of used cars, a second-hand purchase bought at the right time can make more financial sense than a new car.
Understanding Car Depreciation in Simple Terms
Depreciation refers to the gradual reduction in a car’s monetary value over time due to age, usage, and market factors. Every vehicle begins losing value from the day it is registered, influenced by elements such as mileage, maintenance history, model popularity, and brand strength.
Knowing how depreciation works is very important to determine a vehicle’s future worth. For instance, two cars of the same age may differ significantly in resale price depending on their reliability and maintenance. Analysing used car valuation and depreciation allows sellers and buyers to determine fair pricing, negotiate with confidence, and plan ownership with a clearer financial outlook.
How Depreciation Affects New vs Used Car Buyers
In the first three years, new cars usually lose the most value, and their prices go down greatly with the arrival of newer models. On the contrary, when you are buying 2nd hand cars in India, the depreciation hit is much more gradual afterwards, giving a more stable value. This enables buyers to purchase well-maintained cars at a cheaper price, avoid steep early losses, and focus on daily use and comfort, instead of the sharp decline suffered by new cars in their value.
Average Depreciation by Car Age
IRDAI (Insurance Regulatory and Development Authority of India) is the authority that has approved standard vehicle depreciation rates in India. These rates are the percentages which are used to calculate the Insured Declared Value (IDV) that will be the basis for compensation in case of a total loss or theft. The rates change every year according to the vehicle’s age.
| Car Age | Depreciation |
| Up to 6 months | 5% |
| 6 months to 1 year | 15% |
| 1 year to 2 years | 20% |
| 2 years to 3 years | 30% |
| 3 years to 4 years | 40% |
| 4 years to 5 years | 50% |
| More than 5 years | Determined mutually by insurer and policyholder |
How to Calculate Car Depreciation Rate
It is essential to recognise the depreciation of a car when figuring out its present value in the case of buying or selling. The online calculators can give an estimate by just providing basic details, or alternatively, the accurate vehicle value can be obtained by manually calculating using the established methods.
Here are the two methods to calculate depreciation manually:
1. Prime Cost Method
This method calculates depreciation as a fixed percentage of the car’s original purchase price. The formula is:
Depreciation = Car’s purchase cost × (Number of days owned ÷ 365) × (100 ÷ Car’s expected life in years)
2. Diminishing Value Method
This approach considers the reducing value of the car each year, reflecting that vehicles lose more value in their initial years. The formula is:
Depreciation = Car’s purchase value × (Number of days owned ÷ 365) × (Car’s expected life ÷ 200)
The Financial Edge of Buying Used Cars
Purchasing a second-hand car is financially advantageous since the highest rate of depreciation has already taken place. The percentage of first-time buyers is 56% in used car purchases, which reveals that their preference is for cars that have already absorbed the largest value drop. Second-hand cars have a slower rate of depreciation and a reduced cost of running, making them a more stable and cost-efficient option of ownership.
Conclusion
Buying a used car enables the buyers to avoid the highest depreciation that is witnessed within the initial few years. This ensures that it becomes easy to determine the current value of the vehicle and assess the financial status of owning the vehicle. Observing how value stabilises over time assists buyers in making thoughtful choices on realistic cost expectations.
Factoring in depreciation highlights how used cars retain value beyond the initial decline. This perspective helps in predicting long-term expenses and likely resale value, indicating that the decision to own a vehicle after its initial loss period provides a more measured approach to ownership while maintaining financial awareness.
