Insurers use your car’s depreciation to calculate its actual cash value (ACV), determine claim payouts in total losses, and make other evaluations. Collision and comprehensive insurance, for instance, may replace your car in a covered claim if it’s damaged beyond repair, but insurers typically only cut a check for its ACV (minus your deductible)—not the amount you’d need to buy the same car in a newer make or model.
How Car Depreciation Works
Depreciation is a type of accounting method that shows how normal use affects your car’s value over time. It’s not necessarily the last say on your car’s market value, but it gives a rough estimate of your car’s worth. This is helpful for insurers calculating your policy premiums, because your car’s value is often one of the top factors considered. In general, you’ll find depreciation to be your car’s purchase price minus its potential sale price. It’s calculated by taking your car’s initial value and applying an average annual depreciation percentage to each year you plan on owning it. Cars usually depreciate quickly and significantly in just a few years, even if they’re in good condition. Several factors determine your car’s ultimate value (see below), but the average car loses up to 60% of its suggested retail price (MSRP) in the first five years, dropping by 20% in the first year alone and then 15% annually in the other four years. For example, say you have a car with an MSRP of $24,770. Here’s how its estimated worth declines as its total depreciation amount rises, based on average depreciation rates and expected years of ownership:
$20,906 after the first year ($3,864 depreciation)$17,645 after the second year ($7,125 depreciation)$14,892 after the third year ($9,878 depreciation)$12,569 after the fourth year ($12,201 depreciation)$10,608 after the fifth year ($14,162 depreciation)$7,557 after the seventh year ($17,213 depreciation)$4,543 after the 10th year ($20,227 depreciation)
Knowing your car’s market value is important for making informed coverage and vehicle repair decisions and ensuring you have the protection you need. For instance, if your current car loan is higher than your car’s market value because of depreciation, opting for gap insurance can cover the difference so you’re not stuck paying for a vehicle you don’t own outright after a total loss. Gap insurance is offered by many insurers as a policy add-on to collision and comprehensive coverage for about $20 per year, which is usually cheaper than buying it through the dealer at purchase time.
Factors That Determine a Car’s Value
In addition to your car’s initial price and age, some other factors that may affect your car’s ultimate value are:
Vehicle type: Alternative-fuel and luxury vehicles often have higher depreciation rates than more durable ones such as pickup trucks.Vehicle color: Cars with trendier colors may not retain as much value as those with standard colors such as black, white, or silver.Vehicle features and modificationsInitial vehicle cost when new: Lower-priced cars have higher demand and therefore tend to depreciate less.Accident history: Major past accidents may lower a vehicle’s market price.Mileage: High mileage means there’s more wear and tear on the transmission, engine, and more, reducing a car’s overall value.Make and model: Makes or models with known problems may depreciate faster; some makes or models also retain value better than others. Overall vehicle conditionLocal selling prices for similar cars
The Jeep Wrangler, for instance, has the lowest depreciation rate after five years, depreciating only about 30.9% in that time. On the other hand, a BMW 7 Series depreciates an average of 72.6% by the five-year mark. Insurers choose to weigh different factors to determine depreciation and ACV. State Farm, for instance, says it bases your car’s actual cash value on “its year, make, model, mileage, overall condition, and major options—minus your deductible and applicable state taxes and fees.” GEICO uses your vehicle’s mileage, features, add-ons, modifications, existing damage before the claim, and recent sales prices of comparable cars in your area to determine its worth. Also, you can minimize your car’s future depreciation by buying a high-resale model and choosing a used car over a new one. Keeping your car in good shape by following the recommended maintenance schedule (and maintaining records) and driving less than average also help keep your car’s value up.
