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Car depreciation: The hidden cost you need to budget for
Learn how automobile depreciation quietly turns into your largest ownership cost and discover practical ways to safeguard your finances from this unseen expense.
Key takeaways:
- Depreciation of your car is generally your biggest cost of ownership—a ₹10 lakh vehicle can lose ₹5-6 lakhs of value over 5 years, more than what you will pay for fuel, insurance, and maintenance collectively.
- A variety of influences dictate depreciation, including the reputation of the brand, fuel type, mileage, maintenance history, and even the color you choose
It is always very thrilling to purchase a car, but do you know that it begins depreciating the moment you take it out on the road? This invisible expense, referred to as depreciation, can impact your wallet more than fuel, insurance, and maintenance.
However, most buyers are only concerned about EMIs and mileage. This means they entirely forget this largest car-owning expense. Therefore, knowing about depreciation makes you wiser in buying a car and saves lakhs of rupees in the long run.
So, let us analyse car depreciation and what you can do to shield your money.
What actually is car depreciation?
Car depreciation is the reduction in your car's value over time. It's the difference between how much you bought your car for and how much you can sell it for in the future.
Think of it this way: You purchase a new smartphone for ₹50,000. Two years later, you can only sell it for ₹15,000. That ₹35,000 loss is depreciation.
Cars are the same, but with much larger numbers. A new car priced at ₹10 lakhs could be worth just ₹6 lakhs after three years. That ₹4 lakh fall is depreciation.
How quickly do cars depreciate in India?
Cars depreciate at varying rates, but the trend is the same for most cars:
| Car Age | Average depreciation | Value of a ₹10 lakh car |
|---|---|---|
| Brand new | 10-15% (first minute) | ₹8.5-9 lakhs |
| 1 year | 15-20% | ₹7-7.5 lakhs |
| 3 years | 30-40% | ₹6-7 lakhs |
| 5 years | 50-60% | ₹4-5 lakhs |
| 8 years | 70-80% | ₹2-3 lakhs |
For illustration purpose only
Example: Vikram bought a new car for ₹9 lakhs. After driving it for just one year, he needed to sell it. He was shocked to get offers of only ₹7.2 lakhs – a loss of ₹1.8 lakhs in just 12 months!
Factors that affect car depreciation
Not all cars depreciate at the same rate. These factors make a big difference:
Car brand and model
Some brands retain their value more than others.
Type of fuel
With increasing fuel costs and environmental considerations, petrol and diesel cars depreciate more quickly than before. However, CNG and electric vehicles tend to retain value better.
| Fuel type | Year depreciation rate |
|---|---|
| Petrol | 40% |
| Diesel | 45% |
| CNG | 35% |
| Electric | 50% (highly variable) |
For illustration purpose only
Car’s usage
Heavy kilometres on the odometer accelerate depreciation. This means that a vehicle covering 50,000 km will depreciate more compared to the identical model with only 25,000 km covered.
Colour option
Believe it or not, car colour affects resale value! In India, silver, white, and grey cars typically sell faster and for more money than cars with unusual colours.
How depreciation impacts your finances
The true cost of ownership
Most people only think about EMIs, fuel, and insurance when buying a car. But depreciation is often your biggest expense.
Example: For a ₹10 lakh car kept for 5 years:
- Depreciation cost: ₹5-6 lakhs
- Fuel cost (50,000 km): ₹2.5-3.5 lakhs
- Insurance (5 years): ₹1-1.5 lakhs
- Maintenance: ₹75,000-1 lakh
Depreciation is greater than all others combined!
Loan underwater issues
If your car loses its value more quickly than you have paid off the loan, you will owe more than the vehicle is worth. This is being "underwater" or having "negative equity."
Example: Priyanka bought a ₹12 lakh car with a 7-year loan and a 10% down payment. After 3 years, she still had ₹8.4 lakhs owing, but the car was only worth ₹7.2 lakhs post depreciation. When she needed to sell, she had to pay ₹1.2 lakhs out of pocket to settle the loan.
Insurance gap issues
If your vehicle is wrecked in an accident, insurance pays only the market value at the time, not what you owe or what you paid.
Example: Rahul's 2-year-old vehicle was wrecked in an accident. He still owed ₹9 lakhs on his loan, but insurance paid only ₹ 7 lakhs (the value of the car at the time). He had to pay the ₹2 lakh difference out of pocket.
Conclusion
Car depreciation is the unseen expense that majority of customers overlook, but its impact on your finances is enormous. So, if you learn about depreciation and select cars that retain value longer, you can save lakhs of rupees.
Remember to include depreciation in the car budget, pay a higher down payment, or save money by purchasing slightly used cars. These steps can help you appreciate your car without letting depreciation wipe out your wealth unnecessarily.
Disclaimer: The information in this article is for the purposes of information only. The personal views expressed herein are not necessarily the views of Axis Bank Ltd. and its staff. Axis Bank Ltd. and/or the author will not be held liable for any direct/indirect loss or liability arising from the reader for making any financial decision based on the contents and information. Please seek the advice of your financial advisor before making any financial decision.
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