Why your car loses value over time (and how to slow it down)

Do you have a car? Or are you planning to purchase an automobile soon? One thing that you can’t skip is depreciation. We are sure you must have heard this term before, from your dad or that one financial guy in your family or friend circle. But when you have a car of your own, it becomes crucial to take note of certain things including loan terms, interest rates, down payments, compulsory third-party insurance, comprehensive insurance and add-ons, and more.

While we have discussed all the crucial finance and insurance terms for car buyers including depreciation, today we’d like to shed extra light on the subject. But first, let us understand what an asset is.

Whether you view your car as an extension of your personality or possess sentimental value, it is indeed an asset. What is an asset? It is a financial term that means anything that has a monetary value. There are two types of assets: appreciating and depreciating.

• Appreciating assets: Assets whose financial value increases with time like land, gold, and stocks.
• Depreciating assets: Assets whose value decreases with time like cars.

The reduction that depreciating assets experience over some time, mostly years, is called depreciation and the rate at which the asset value lowers is called the depreciation rate.

We hope that by now, you have a brief idea about depreciation. Let us now dive deeper into the world of car depreciation, understand the factors affecting it, learn how to slow it down, and much more.

What is car depreciation?

Car depreciation refers to the process wherein your car loses its value over time. For example, if you bought a car for PHP 220,000 then after a few years it will be worth PHP 130,000, which means over time the vehicle depreciated PHP 90,000 in value.

Did you know that most cars experience the maximum decline in their value during the first year of their life? Depreciation post the one-year mark starts to slow down and it falls more as the car approaches the three-year mark.

As per reports, depreciation is one of the most overlooked costs in regards to a car’s cost. It doesn’t matter if you are buying a brand-new car or a pre-loved unit, depreciation remains one of the most expensive components of car ownership.

Year-on-year car depreciation

While car depreciation is a global phenomenon with common influencing factors, here we’d like to take a closer look at the concept as per local phenomenon.

Generally speaking, in the Philippines, a new car depreciates around 20% during the first year of its existence. However, if the vehicle is exposed to heavy usage or unusual mileage, the depreciation rate can climb up to 25% which is 1/4th the cost of the car.

Post the one-year mark, a car depreciation rate is 15%, i.e., it loses this much percentage of its value every year. But it is not fixed as models that do better and lose an average of 10% value in a year.

Factors influencing car depreciation

From the above discussion, it is clear that car depreciation is directly associated with the age of the car, i.e., as the car ages, its value decreases. Thus making time a tangible factor when it comes to the depreciation rate. Let us now check out some of the intangible factors that play a crucial role in affecting the car’s value over time. The table below discusses these factors in detail -

Car brand	One of the biggest factors that affect car depreciation rate is brand reliability. Automakers like Toyota, Honda, and Mitsubishi enjoy strong reliability stature in the Philippines and therefore suffer less depreciation compared to similar-aged cars from other brands.  Note: The reliability notion is also supplemented by the fact that these brands enjoy lower maintenance costs compared to others in the market.
Mileage	Another major factor affecting a car’s depreciation rate is its odometer reading or mileage. The higher the reading on the odometer, the more the car depreciation (less value of the car). Wondering why it’s an intangible factor? That’s because it is tied to the reliability of the vehicle - cars from reliable brands, despite the high odometer reading, hold their value well.
No. of owners	Another serious factor impacting a car’s value is the number of owners. A car that has undergone multiple changes in ownership will command lesser value.  For instance, if there are two cars in the used car market with the same make, model, year, and mileage, the one that has just entered the used car market will have more value compared to the one with multiple owners. Reason? Cars with frequent changes in ownership have a stigma attached to them and are sold off quickly on the perception of mechanical issues and poor maintenance records.
Service History	A car will have a good and timely service record that too at authorized service centers will enjoy a low depreciation rate. Such cars are perceived to hold greater value compared to the ones with irregular service records.
Warranty	Cars that are still under the manufacturer’s warranty or have extended warranty upon them fetch higher value as they are covered by the car manufacturer against defects for a longer period.
Fuel efficiency	A car with higher fuel efficiency enjoys a lower depreciation rate, as the next owner is assured about its low running cost. In the Philippines, cars like the Vios, Mirage, Swift, and Wigo, to name a few, have created a name for themselves as the most fuel-efficient cars and therefore they hold their value very well in the used car market.
Luxury	Plush, luxurious cars experience a high depreciation rate compared to the more popular cars. That’s because the older a car gets, the more it is required to be taken care of and maintained. Purchasing the right, genuine parts and hiring expert technicians is a very costly affair.
Condition	A car’s value is also dictated by its mechanical and overall exterior & interior condition. If a car is well maintained, with no major physical damage or wear & tear, it would translate into higher value for the potential buyer.
Market demand	Market trends, consumer preferences, and economic conditions also impact a vehicle’s value.

Other uncommon factors -

Depreciation is not an exact science, therefore one can’t be exact about the factors that influence an asset’s value. While we have tried to list all the major factors that commonly impact a car’s value, here are a few less common ones -

• Accident: A car with an accidental history loses value, irrespective of its age. The more severe the hit, the more its value falls.
• Exiting of manufacturer: Over the years several car manufacturers packed their bags and exited the Philippines market. Brands like Daewoo, Daihatsu, Fiat, Lincoln, Opel, Proton, and Renault have gone down this path and as a result, their cars took a hit in terms of value. In the used car market, such cars are looked down upon due to concerns regarding spare part availability and future maintenance.
• Modification/change in government policy: A change in government policy impacting a specific type of vehicle category causes such units to lose value.

Ways to slow down car depreciation

It is a fact that car depreciation can’t be eliminated, however, there are ways to minimize its impact on your car’s value. Here are some tips to do so -

Tip 1: Well-maintained & good condition

One of the easiest things to do to minimize depreciation is to keep the car in good condition. With proper care you can avoid damages on the inside and outside, thus maintaining the car’s value. We recommend protecting your car from harsh weather conditions by parking in a covered area, also regular washing will allow you to identify rust and paint damage. Also, opt for seat covers, floor mats, and sunshades for a well-maintained interior.

Tip 2: Regular maintenance & service

If you follow the manufacturer’s recommended service schedule for your vehicle, including fluid checks, oil changes, and tire rotations. Further, keep a proper record of all the service work as anyone can claim to do so but not everyone can present proof. Remember a car with a full service history has more value than one with part or no service history.

Tip 3: Avoid modifications

While car modification is a personal choice, however, it does lower the vehicle’s value. So, if possible stay clear from aftermarket suspension, engine modification, and vinyl wraps. Such modifications hurt the value, as they signify to potential customers that the car is driven hard.

Tip 4: Keep mileage in check

By far this one is the most challenging tip to follow through, especially if you love driving or need the car for commuting. We recommend opting for public transportation whenever possible.

Tip 5: Insure your car

Did you know that comprehensive car insurance provides owners protection against the financial impact of depreciation in the event of an accident or theft? So, in addition to CTPL, opt for comprehensive insurance always.

Tip 6: Deals and incentives

Make sure to ask for and consider discounts and deals while purchasing a car, as it will offset the impact of depreciation in the event of an accident or theft. Further, do not shy away from low-interest financing, rebates, and other promotions as they’ll reduce the cost of ownership.

Tip 7: Consider leasing

Wanna stay clear of depreciation concerns, leasing is a viable option. Yes, you won’t be the owner, but you’ll also avoid depreciation hit and in the future lease another car with better features.

Tip 8: Opt for a popular colour

Remember to choose a car in a popular colour it will positively impact its resale value. Go for evergreen shades like black, white, and silver as they are the most common choice among buyers.

Tip 9: Time your sale right

You can benefit a lot by calculating your car’s selling time mindfully. For instance, try reselling the car before a major maintenance milestone or while the car is still under warranty to get maximum resale value.

Tip 10: If possible buy used, instead of new

By purchasing a used car instead of a new one, you can skip the most significant depreciation that occurs in the first year. A vehicle that’s a year or two old will save depreciation costs while offering you a well-maintained car with the latest features.

Bottom line

By understanding car depreciation and the steps to minimize its impact, you can make the most out of your investment. Just remember to choose the right car model, keep the mileage low, timely service & maintenance, and timing the sales right.

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