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When you invest in an asset like a car, it's essential to grasp the concept of depreciation. Depreciation is simply the decline in value that occurs over time as you use or own the asset. This principle applies universally to fixed assets, including vehicles. While you may not be able to do much about the depreciation process entirely, having a solid understanding of how to calculate depreciation of a car can help you make informed decisions

What is Depreciation?

Depreciation is simply the reduction in the value of an asset over time when you use it or own it. This applies to all kinds of fixed assets which also includes cars. Car depreciation is also referred to as used car valuation, which is what car depreciation calculators estimate. The general rate of depreciation is decided by government authorities, but it can be influenced by individual factors related to the car as well. The general rates are applicable on the basis of time. Apart from that, factors like the physical condition of the car, functionality and drivability can further influence the rate of depreciation applicable to your car. The federal authorities of the UAE determine the depreciation rate that applies to an asset including the car.

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*Above mentioned prices are for Honda City EX 1.5L, 2017 model.
*Above mentioned prices are for Honda City EX 1.5L, 2017 model.

The accelerated depreciation method of calculation is the most common way to determine the baseline depreciation of cars and other fixed assets. This way, the depreciation for the first year after the car hits the road becomes equal to the straight-line method while the upcoming one increases for the first few years. The resulting percentage can be later influenced by other factors related to your car.

Car Depreciation Calculator – How Does It Work?

To simplify the process of estimating your car's depreciation, you can turn to online car depreciation calculators. Auto depreciation calculators use various factors such as the car's make and model, purchase price, age, and mileage, to provide an estimate of its current value.  All you need is the initial value of the car when you purchased it and the amount of time for which you have owned it. The time can be in years rather than days here. Simply enter these values in their assigned places to calculate vehicle depreciation, i.e., the value of the car after depreciation. Note that some more comprehensive vehicle depreciation calculators even offer additional value calculations for several timelines rather than just one. 

Car Depreciation Calculation Formula - 

Automobile depreciation calculators use either of these two formulas to calculate car depreciation — 

  1. Cost of running the car x (days for which you have owned the car/365) x (100%/Years of Effective Life) = Lost Value of the Car
  2. The true value of the car when purchased x (days owned/365) x (Years of Effective Life/200%)

While car depreciation calculators can offer a helpful starting point, it's essential to consider additional factors specific to your car's condition and market trends.

Having explored how a car depreciation calculator UAE works, let’s look at a quick run-down of the current car depreciation standards applicable to standard private vehicles across the UAE —

Year Depreciation Percentage
First Year 0%
Second Year 5%
Third Year 10%
Fourth Year 15%
Fifth Year 20%
Sixth Year and above 30%

The UAE is rapidly becoming a significant used car market. As per reports, the value of used cars increased from 4 to 10 %in the last year. Moreover, used cars are now selling faster and at a more expensive price than before.

This leads to an expert prediction that used cars may depreciate slower in value than new cars and also fetch more during resale.

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How Can Depreciation Influence Car Insurance Plans?

Depreciation plays a crucial role in determining the insured declared value (IDV) of your car — this, in turn, directly affects car insurance coverage and premiums. 

A lower IDV due to depreciation can result in reduced coverage but may also lead to lower premiums.

For example, if your car retains as much as a 50% decline in its value, your insurance plan will also see a similar decline in the assured sum. At the same time, a lower IDV due to the depreciated value of your car means that you will have to pay lower premiums for the car insurance plan

If that’s something you are looking for, depreciation can actually come in handy. But the result is the same — depreciation will make you lose most of the resale value of the car, which can be problematic if you plan to sell the car when it gets totalled and get a new one. 

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How Can You Minimise Car Depreciation?

Having understood how car depreciation calculators work and the associated factors, let’s see what you can do to minimise your vehicle depreciation rate in UAE -

  1. Maintain Your Car: Regular maintenance and keeping the car in good condition can minimise depreciation. Avoid excessive modifications as they can also lower the car's value.
  2. Consider No Depreciation Cover: Add-ons like no-depreciation cover can protect your car's value, ensuring that you receive compensation based on the original purchase price in case of total loss.
  3. Choose High Resale Value Models: Look for car models with high resale value and consider investing in one to mitigate depreciation losses.
  4. Limit Usage: Reducing unnecessary usage can slow down depreciation, particularly for luxury vehicles.
  5. Opt for High-Mileage Vehicles: Diesel cars with better fuel efficiency may experience slower depreciation, making them a wise choice for some buyers.

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Factors That Can Affect Car Depreciation

The vehicle depreciation rate in UAE is influenced by various factors, each playing a significant role in determining how much your vehicle is worth over time. While you can always use a car depreciation calculator to check values, it’s also important to understand the impact of each factor.

Here are some key factors to consider —

  1. Physical Condition: The condition of your car's exterior can heavily impact its depreciation rate. Vehicles with numerous dents and scratches tend to depreciate more rapidly, while well-maintained cars retain their value better. Note that many vehicle depreciation calculators, while performing depreciation calculation in UAE, factor in the standard decline in physical condition based on the car's age.

  2. Fuel Efficiency: Cars with higher fuel efficiency typically depreciate less than those with less efficient engines. For instance, diesel cars, known for their mileage, may depreciate at a slower rate compared to petrol counterparts.

  3. Accident History: A history of accidents can substantially decrease your car's value. Records of past accidents can impact depreciation, as damages incurred can lead to functional and aesthetic defects in the vehicle.

  4. Mileage: Both excessively low and excessively high mileage can affect a car's depreciation rate. While very low mileage may indicate underuse, high mileage can suggest wear and tear. As a thumb rule, cars with moderate mileage are preferred over extremes.

  5. Drivability: The overall driving experience of a car, including factors like acceleration, braking, and smoothness of gear changes, can influence its depreciation rate. For instance, the vehicle depreciation rate in UAE of cars with superior drivability may be less than that of cars with performance issues.

  6. Functionality: The functionality of features such as air conditioning, power windows, central locking systems, and headlights can impact depreciation. Well-maintained features may reduce depreciation, while faulty ones can speed it up.

  7. Service History: Regular servicing and maintenance can minimise depreciation by demonstrating proper care and upkeep. Cars serviced at authorised garages with genuine parts may experience slower depreciation rates.

In a Nutshell

Car depreciation can be confusing if you are a first-time owner with a limited understanding of car depreciation. However, finding out the estimated cost of your car is nothing but easy with easy-to-use car depreciation calculators. However, take note that the actual depreciation applied to the vehicle may differ slightly as per the individual factors that may have an effect on it. Make sure that you take every factor into account when estimating the depreciation that is applicable to your car using a vehicle depreciation calculator. Take a bit of assistance from our experts if you feel the need so that depreciation is calculated correctly.

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