For example, a brand-new 2021 Ford Escape with a sticker price of $30,985 would be worth an estimated $24,788 after one year and just $12,939 after five, according to State Farm’s calculator. While industry averages offer an idea of how much cars depreciate over time, various factors contribute to a vehicle’s actual depreciation rate, including:
MileageVehicle ageInternal and external damageMake/ModelPurchased new or usedDemand in the marketFeatures and technologyMaintenance historyOwnership historyFuel efficiencyColor
How Does Depreciation Affect Car Insurance?
The value of your vehicle is a key factor in your car insurance policy, as it’s the basis for determining your coverage. Your insurer needs to understand what your car is worth to calculate the costs of replacing or repairing it. In many cases, insurers will give you two options when it comes to considering your car’s depreciation:
Actual cash value (ACV): Pays you the amount your vehicle is worth at the time of a total loss, factoring in depreciation. Replacement cost: Pays you the amount it will cost to replace your vehicle with a new equivalent vehicle.
ACV policies cover the value of a vehicle with depreciation taken into account. As time passes and your car depreciates, your policy covers a smaller amount—and you’ll pay lower premiums. However, if you total your vehicle, you will only receive a settlement for its current market value at the time of the loss. On the other hand, if you opt for the replacement-cost option and your vehicle is deemed a total loss, you’ll receive the amount you need to replace it with a new equivalent one. Your coverage amount does not reduce over time (and could increase), which means your premium will be higher than if you chose an ACV policy.
How Does Depreciation Affect Financed Vehicles?
If your car depreciates faster than you pay off your loan, you could end up owing more than your car’s worth. If you total your car while you’re upside down on the loan and you have ACV coverage, you’ll have to pay the difference out of pocket. Because cars depreciate rapidly in the first couple of years, especially in the first year, replacement-cost coverage can prove to be most beneficial when you first finance a new car. It might make sense to switch to ACV as your loan payments catch up to the car’s value.
What Car Depreciation Means for Car Buyers
Understanding how car depreciation affects your auto insurance rates and coverage is important, so you’re not met with an unfortunate surprise. No one wants to end up with no vehicle, a bill for an outstanding auto loan balance, and an insurance check that falls short. You can ensure you’re prepared by weighing your coverage options and choosing the best fit for your situation. In some cases, the extra expense of replacement-cost coverage can offer you the security of knowing you will be able to pay off your loan balance or get a new car if you total your current vehicle. However, ACV can also make sense if saving is a top priority or if you’re paying off a car faster than it’s depreciating.
