The loss in value of an asset over time is known as depreciation. Cars, too, are also subjected to depreciation. There are a number of factors that are taken into considering whilst calculating the rate of depreciation. The value of depreciation also depends on the method used to calculate the depreciation.
In this guide, we will discuss the factors determining car depreciation and car depreciation rules.
What Are the Factors That Affect Car Depreciation
Several factors affect the rate at which the depreciation of cars is calculated. In this section, we will go through each of the main factors in detail.
Car’s Condition and Accident History
Wear and tear refers to the decline of a car’s performance over time as a result of regular use. The value of a car is diminished due to wear and tear. Even when an asset is used with care and regular maintenance, wear and tear is factored in to compute depreciation.
Moreover, salesperson also check the car history like accident history traveled in used car valuation. If you follow the car maintenance schedule regularly, the less wear and tear it will endure, resulting in a reduced rate of depreciation.
Car Age and Mileage
Mileage is another significant factor that impacts the depreciation rate of a car. The total number of miles travelled is referred to as mileage. A car with a higher mileage will depreciate faster than one with a lower mileage since a car with a lower mileage will experience less wear and tear and provide a better ride quality.
New Cars with Advanced Features in the Market
With the pace at which the automobile world is growing, we see advanced technologies every now and then. Every automobile brand that launches new products into the market strives to make it a clear-cut upgrade over the already existing products. In the automobile industry, a car of any brand will become obsolete and the resale value of the car drops if there is another car that has integrated better features and specifications.
Defunct Car Models
There are a number of automotive brands who have now discontinued manufacturing cars. The features in that car are now obsolete and will become further obsolete over time. The more the obsoleteness, the higher the rate of depreciation. Thus, the annual car depreciation would be higher if you drive a car of a brand that is now defunct.
Car’s Value at the End of Lifespan
All assets have a particular lifespan after which they cease to function efficiently. The value at the end of lifespan, in accounting parlance, is known as scrap value.
In depreciation of cars, scrap value is also an important factor when computing depreciation. Scrap value is the estimated worth of an item after its useful life has ended. For example, if a car has a 10-year life and is worth AED 100,000 at the end of its useful life, the scrap value would be AED 10,000.
Common Methods to Calculate Depreciation
Depreciation is a non-cash expense – meaning an expense incurred without any involvement of cash. Many tend to often confuse depreciation with amortization which is only depreciation of tangible assets like patents, goodwill or copyrights.
Let’s take a look at how to calculate depreciation on a vehicle. The following are two commonly used methods to compute depreciation:
Straight-line Method
The most basic and often used approach to calculate depreciation is straight-line depreciation. The straight-line depreciation is found by dividing the difference between the car’s purchase price and its estimated value at the end of its useful life by the number of years the car is expected to be used. This approach of computing depreciation is for assets whose value decreases steadily over time.
Reducing or Declining Balance Method of Depreciation
For assets like cars or modern technological innovations, this method is used more to calculate depreciation. In this method, a larger depreciation is recorded in the early years of an asset’s life, while lower depreciation expenses are recorded in the later years.
This concludes our guide about the factors affecting car depreciation and depreciation rules for vehicles. If you are looking to replace the car you have right now, check out this huge collection of used cars for sale in the UAE at reasonable rates.
To learn more about automobiles and the automotive industry, stay tuned to the UAE’s leading auto blog.
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