Depreciation is the value of an asset over its useful life. Vehicle depreciation is the difference between the value of a car when you buy it and when you want to sell it. Several factors affect depreciation, but most cars will lose about 15 to 35 percent of their original value in the first year and up to 50 percent or more over three years. This makes it important for organisations to understand how to control depreciation while improving fleet efficiency.
How Do You Calculate Depreciation?
Depreciation is calculated by subtracting a vehicle’s salvage value from its cost and dividing the answer by the number of years in the asset’s useful lifespan. To get the monthly depreciation of the asset, divide your answer by 12. There are several other methods of calculating depreciation, but this is the most straightforward. You can use a car depreciation calculator to determine depreciation easily.
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Which Cars Depreciate the Least?
Well-maintained, low mileage vehicles depreciate the least. Car makes or models that have a reputation for being reliable also tend to hold their value better than unreliable competitors. Cars that don’t get frequent facelifts or replacements also usually have low depreciation.
Vehicles with high fuel economy also enjoy lower depreciation over time compared to those with lower miles per litre. Cars with a perfect service history and extended warranties also do better with depreciation.
Which Cars Depreciate the Most
Cars with an low reliability rating lose value quickly. The same goes for vehicles with high maintenance costs. Luxury vehicles also depreciate faster, sometimes losing as much as 50 percent of their original value in the first year. Vehicles that get new facelifts every year also lose value faster as buyers dump older models for newer, more advanced options.
What Is the Total Cost of Car Ownership (TOC)?
Total cost of car ownership is a vital variable when calculating vehicle depreciation. The TOC of a car includes all the costs of acquiring the vehicle, including the money paid to the dealership, cost of fuelling, maintenance, driver training, insurance, and permits. TOC is one factor car depreciation calculators use to determine the resale value of vehicles.
Fleet Managers must ensure that they choose their vehicles carefully to curb depreciation and maximise the benefits of their investments.
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How Fleet Managers Can Control Vehicle Depreciation
Here are strategies Fleet Managers can use to deal with depreciation of their vehicles:
1. Be a Strategic Buyer
Buy as early in the model-year as possible and purchase multiple vehicles from the same supplier if possible. Doing this gives you more leverage to negotiate for better prices from dealerships, with significant savings on acquisition costs.
2. Prioritise Specs Beneficial to Your Business
Select only equipment that directly improves the efficiency and productivity of your employees. Rather than pay for extra options that only increase acquisition costs, choose vehicles with features that will increase resale value. For example, executive cars sell well if they have a leather interior and metallic paintwork. Pool cars with air con and built-in satellite navigation are also popular with buyers.
3. Sell Strategically
If you plan to sell your vehicles, sell at the right time of the year. For example, 4x4s sell well during the winter when their stability and control features are valuable for driving on snow and ice. Compact cars are best sold during the summer months. It is also important to sell vehicles before the arrival of replacement models, as newer options often drive down the value of older cars. Before selling, you can use a car depreciation calculator to find the best sales price for your vehicles.
4. Install a Fleet Management Software
Installing a fleet management software such as Vimcar’s Fleet Geo is an effective way to control vehicle depreciation. Fleet Geo offers several features, including route history, mileage logs, and data exportation that help fleet managers schedule preventive maintenance. That way, you can ensure fleet vehicles retain their value for longer while helping the business achieve its objectives.
5. Maintain Vehicles Promptly
An up-to-date service logbook is vital for keeping the value of vehicles. Fleet cars need preventive maintenance at specific mileage and periodic intervals, with detailed service records and receipts available to potential buyers. This gives buyers confidence and peace of mind that they won’t end up with problematic vehicles.
6. Research Vehicles Before Buying
Before choosing any vehicle for your fleet, research the history of older models to see how they hold up their value over the years. Cars that have several generations or frequent makeovers are usually not the best at holding value. A car depreciation calculator will come in handy during your investigation.
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Understanding Vehicle Depreciation
The value of a new vehicle is set to fall when it leaves the showroom and begins active use. The more its usage, the more the drop in its market value when you want to sell it. In other words, depreciation results from the mileage and age of your vehicle before it turns into scrap.
This is an inevitable occurrence that fleet managers will have to face at some point. However, understanding depreciation can help you control it and maintain your fleet’s lifespan and value. This will, in turn, bring ROI and a better selling price. This article will define depreciation
What is Depreciation?
Like every other asset, vehicles are susceptible to wear and tear. Eventually, a vehicle reaches a point where it is as valuable as scrap. Inadequate maintenance, high mileage, and even poor quality are the main catalysts for accelerated vehicle depreciation.
When you eventually decide to sell your car, say after five years, the market value would have stopped way beyond the original price. Some certain brands and models have a high depreciation rate, such as luxury vehicles.
When Does a Vehicle Depreciate?
Typically a vehicle will most likely depreciate within the first 12 months of ownership. The drop in the market value within these first 12 months would be estimated at around 20-30%. It would maintain a steady rise until it reaches about 50% in the next five years. Here is an estimate of how quickly your fleet depreciates within a period.
- First year: 15-30% in depreciation. Retains about 65-85% of the original market value.
- 3 years: Between 40-60%. At this point, it still retains about 40-65% of its original market value.
- 5 years: 60-70% rise in depreciation. Original market value falls to around 30-40%.
By the time your vehicle is 8-10 years on the road, it has depreciated to about 80% and retained only 20% of its original market value.
A vehicle’s estimated lifespan is 20-25 years. With each year, its original market price drops by 15%.
Controlling Vehicle Depreciation
As mentioned above, controlling your fleet’s depreciation is crucial in obtaining ROI and a better selling price. A practical strategy to achieve this is the proper maintenance of your vehicles. This also improved fuel and safety efficiency, hence saving more on time and money.
Here is a summarised list of things to consider when managing your vehicle’s depreciation:
- Reduce mileage to an average level.
- Ensure regular cleaning if your fleet
- Follow the manufacturer’s recommendation and specifications for vehicle maintenance
- Use manufacturer recommended spare parts
- Do not change or modify certain parts such as spoilers
- Comply with MOT regulations to avoid failures and mishaps
- Install a vehicle tracking system in your fleet to stay abreast with your fleet’s progress and performance. This saves more mileage, time, and money.
Vehicle depreciation is unavoidable but manageable. Proper vehicle maintenance and compliance with set regulations can significantly scale down the drop in value.
Factors Which Contributes to Vehicle Depreciation
- Mileage: The more miles your vehicle covers, the more the drop in value. In the UK, mileage is estimated at around 10-12,000 miles a year.
- Warranty: Long warranty cover from the manufacturer means better service and maintenance and lesser depreciation.
- Brand and Model: Unreliable and unpopular models can lose market value within a short time.
- Fuel economy: Fuel guzzlers typically depreciate faster.
Regardless of the quality of fleet management practices, depreciation is a stark reality fleet managers will have to confront at some point. But you can boost the resale value of your fleet vehicles with sound vehicle purchase and sales strategies and preventive maintenance. Vimcar’s fleet management system offers a myriad of solutions to help you improve fleet efficiency and keep resale value high.