Everything You Need to Know Car Depreciation

If you own a car or are planning to buy one, then you must be aware of the concept of depreciation. It refers to a gradual decrease in the value of your car due to the daily wear and tear the car goes through. Depreciation can have a considerable impact, especially when it comes to the price and claim amount of your comprehensive car insurance policy. Hence, you should know how to calculate it, for which a car depreciation calculator can come in handy. Let’s understand the concept of depreciation and learn more about car depreciation calculators.

What is Car Depreciation?

Car depreciation refers to the reduction in a vehicle's value over time. As soon as you drive a new car off the lot, it begins to lose value. This depreciation impacts both your insurance rates and the car’s resale value. The difference between the car’s original purchase price and its current market value is what defines depreciation.

How to Calculate Car Depreciation?

A car depreciation calculator is an online tool that helps you give a quick estimate of your four-wheeler’s current depreciation rate. Understanding the same can help you get a clearer idea of the present worth of your car and also understand its Insured Declared Value or IDV. For the uninitiated, the IDV refers to the maximum amount that you can receive from your insurance company if your car were to go through irretrievable theft or a total loss.^ To know how car insurance IDV is calculated, you will have to subtract the present depreciation rate of your car from the manufacturer’s selling price. The depreciation of your car can be manually calculated in the following two ways, though there are many other methods:

1. Prime cost method

Cost of running the four-wheeler × (Days you have owned the car)/365×(100%)/(Effective life in years)

2. Diminishing value method

Value of the car when bought×(Days you have owned the car)/365×(200%)/(Effective life in years) A car depreciation calculator can ease the process by automating the process.

How to Use a Car Insurance Calculator?

To know the IDV and the depreciation of your car insurance using a calculator, follow the given steps:

1. Visit a reliable website providing a car depreciation calculator.
2. Enter the ‘ex-showroom’ price of your car.
3. Select the year in which you registered the car.
4. Submit by clicking on the ‘Calculate IDV’ button.

You will get an IDV estimate based on the information you have provided.

How Does Car Depreciation Affect Buyers and Sellers?

For Buyers:

A lower purchase price may seem attractive, but opting for a car with a slower depreciation rate is a wiser choice. Such vehicles tend to hold their value better, require fewer repairs, and offer better reliability. This results in lower maintenance costs and a better return on investment over time.

For Sellers:

A car that retains a higher percentage of its original value will fetch a better resale price. Choosing a vehicle known for its durability and slow depreciation can help maximize returns when selling. Regular maintenance and keeping the car in good condition further help in securing a higher resale value.

Why is Depreciation an Important Factor to Consider?

Depreciation is a critical factor to consider in car insurance as it directly impacts the compensation you receive during claim settlements. Over time, vehicles and their components naturally deteriorate due to wear and tear, leading to a decrease in their value. This reduction is what can be called depreciation. When filing a claim for damages or repairs, insurance companies often factor in depreciation, resulting in a reduced payout reflecting the diminished value of the damaged parts. Understanding depreciation is very important, especially when you are making sure that you receive adequate compensation to cover repair or replacement costs, highlighting its importance in car insurance. Also Read: Depreciation Shield in Car Insurance: Benefits and Importance During Renewal

Ways to Minimise Car Depreciation

Car depreciation is inevitable but can be mitigated through proactive measures.

1. Regular maintenance: Timely servicing and repairs help maintain the car's value.
2. Avoid overloading: Prevents accelerated wear and tear.
3. Responsible driving habits: Ensure safety and reduce mechanical strain, slowing depreciation.
4. Garage parking: Shields from environmental damage.
5. Protective measures: Rust-proofing and paint protection prolong lifespan.

Prioritise maintenance, responsible driving, and protective measures to minimise depreciation and retain value longer, preserving investment and achieving long-term cost savings. Also Read: All About Using IDV Calculator For Your Car Insurance Policy

Rate of Car Depreciation in Insurance 

To ensure that depreciation evaluation is fair and standard across insurance companies, the Insurance Regulatory and Development Authority of India (IRDAI) has laid down depreciation rates for all cars.^# These rates depend primarily on the age of the car. Let’s look at them:

Age of the car	Depreciation rates
0-6 months	5%
6 months - 1 year	15%
1-2 years	20%
2-3 years	30%
3-4 years	40%
4-5 years	50%
Above 5 years	Decided as per the insurer and policyholder’s agreement

Car depreciation rates also apply separately to different car components. These include:

Components of the car	Depreciation rates
Rubber, nylon, and plastic parts; tyres and tubes; batteries; airbags	50%
Glass components	Nil
Fibreglass components	30%
Paintwork	50%

These rates are subject to change as per IRDAI’s directives.

Minimizing Car Depreciation Rate: Tips and Tricks

• Choose a Resale-Friendly Car – Opt for models with high demand and strong resale value.
• Regular Maintenance – Keep up with servicing, oil changes, and necessary repairs.
• Limit Mileage – Higher mileage lowers resale value, so drive efficiently.
• Protect the Exterior & Interior – Use seat covers, wax the exterior, and avoid unnecessary wear.
• Avoid Excessive Modifications – Customizations can reduce buyer interest and resale price.
• Maintain Service Records – A well-documented history increases buyer confidence.
• Choose Neutral Colors – Common colors like white, silver, and grey tend to have better resale value.
• Sell at the Right Time – Avoid selling when newer models of the same car are launched.

How Does Car Depreciation Affect Your Car Insurance Plan?^

When you raise a claim under your car insurance policy for damages, the claim is usually paid after deducting the applicable depreciation rate according to the age of your car. For instance, let’s assume Mr Navin raised a car insurance claim for damages to his 2.5 years-old car. The total bill for the repairs came to Rs 15,000. The rate of depreciation applicable to the claim amount would be 30%, which would be Rs 4,500. So, the claim amount he received was Rs 10,500 (15,000 – 4,500), excluding any applicable policy deductibles. If you want to receive the full claim amount without any deduction as per the depreciation rate, you can opt for the zero-depreciation add-on. This add-on is only available with a comprehensive car insurance plan and helps you receive the maximum claim value when you raise a claim for damages. If you opt for this add-on, your premium can increase. However, it can prove to be helpful in the long run since you get the full value of the claim amount when you raise the claim.

What Factors Affect the Depreciation Value of The Car?

1. Age of the Car – The depreciation rate is highest in the first few years. A brand-new car can lose up to 50% of its value in the first five years.
2. Mileage – The more kilometers a car has been driven, the lower its resale value. High mileage indicates more wear and tear, which can lead to costly repairs.
3. Brand & Model – Some brands and models hold their value better due to their reliability, durability, and reputation. Luxury and premium brands generally depreciate slower.
4. Condition & Maintenance – Cars with a well-maintained service history and fewer mechanical issues depreciate at a slower rate than those with poor upkeep.
5. Fuel Type – Petrol cars generally depreciate faster than diesel ones, but with the rise of electric vehicles, fuel preferences may shift depreciation trends in the future.
6. Market Demand – If a car model is popular and in high demand, it retains value better. Limited editions or discontinued models may either appreciate or lose value quickly.
7. Accident & Damage History – A vehicle with a history of major accidents or repairs depreciates faster, as buyers perceive it as risky and unreliable.
8. New Model Releases – When a new version of a car is introduced, older models lose value quickly as they become outdated in terms of technology and features.
9. Ownership History – Cars with a single owner are generally preferred over those with multiple owners, as frequent ownership changes raise concerns about reliability.
10. Color & Features – Neutral colors like white, black, and grey have better resale value. Cars with essential safety and convenience features also depreciate slower.

Also Read: Advantages of Zero Depreciation Cover in Comprehensive Insurance

Conclusion

Car depreciation is a significant factor influencing both buyers and sellers in the automotive market. Understanding its impact is crucial for making informed decisions during the buying and selling process. Depreciation affects affordability for buyers, insurance costs, and resale values, while sellers must consider it when pricing their vehicles. Reducing depreciation through regular maintenance, responsible driving, and protective measures can help preserve a car's value over time. Ultimately, awareness of depreciation empowers individuals to get through the market effectively, optimising financial outcomes for all parties involved. By considering depreciation, both buyers and sellers can ensure fair transactions and maximise the value of their investments in the long run.

FAQ’s

What are the fastest depreciating cars in India?

The fastest depreciating cars in India typically include models that are prone to rapid value decline due to factors such as high initial depreciation, low demand in the used car market, and expensive maintenance costs. Some examples might include certain luxury vehicles or models with limited popularity and high maintenance expenses.

What are the slowest depreciating cars in India?

The slowest depreciating cars in India are generally those with a strong brand reputation, high demand in the used car market, and good reliability records. These cars tend to hold their value well over time due to factors such as brand perception, build quality, and resale demand.

How to calculate the WDV of a car?

Calculating the written-down value (WDV) of a car involves considering its original cost, depreciation rate, and the number of years it has been in use. The formula for WDV is Original Cost - (Depreciation Rate x Original Cost x Years of Use). Insurance companies and individuals commonly use this calculation method to determine the current value of a car for insurance or resale purposes.

How to calculate car depreciation price?

To calculate the car depreciation rate, you typically need to determine its initial purchase price, depreciation rate, and the number of years it has been in use. Then, you apply the appropriate depreciation formula to arrive at the depreciated value of the car. This adjusted value reflects the reduction in the car's worth over time due to factors such as age, wear and tear, and market conditions.

What is the car depreciation formula?

The formula for car depreciation depends on the method used for calculation. Two common methods are the Prime Cost Technique and the Diminishing Value Technique.

1. The Prime Cost Technique calculates depreciation as a fixed percentage of the car's total cost over its useful life. Formula: The cost of running the car X (number of days the car is owned ÷ 365) X (100% ÷ effective life in several years)
2. The Diminishing Value Technique calculates depreciation based on the car's decreasing value over time, often as a percentage of its current value. Formula: The purchase value of the car X (number of days the car is owned ÷ 365)X (effective life in number of years ÷ 200%)

What is the cause of depreciation in a car's value?

Car depreciation occurs due to factors such as natural wear and tear, market demand, mileage, new model releases, and technological advancements. The car’s age, maintenance, accident history, and ownership record also impact its value.

Why should I use a car depreciation calculator?

A car depreciation calculator helps estimate the current and future value of a vehicle. It is useful for buyers, sellers, and insurers to understand resale value, insurance coverage, and financial planning.

How fast does the value of a car depreciate?

A new car can lose 20-30% of its value in the first year and up to 50% within five years. The depreciation rate varies based on brand, maintenance, and market demand.

What is IDV, and how does the car depreciation rate affect it?

IDV (Insured Declared Value) is the maximum amount an insurer will pay in case of theft or total loss. As a car depreciates, its IDV reduces, leading to lower insurance claim amounts.

Can I claim the depreciation amount under my car insurance policy?

Standard car insurance does not cover depreciation. However, a zero-depreciation add-on covers the depreciation amount, ensuring a higher payout for repairs or claims. *Standard T&C Apply ^Claims are subject to terms and conditions set forth under car insurance policy. #Visit the official website of IRDAI for further details. Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.