How to Calculate the Proper Depreciation on a Vehicle

January 27, 2012

The minute a new car is driven off of the lot, it will experience a drop in its depreciation value. Basically as the car ages, its value will decrease. There are many instances in which the depreciation needs to be calculated. Getting a loan for the car, leasing a car, buying a used car, selling your car, getting insurance, and more. Many people can even deduct the depreciation of their vehicle on their taxes each year so this calculation is very important.

Step 1 – The Original Price

You will need the MSRP or sticker price of the vehicle when it was new. Your car may have this information on the original window sticker or you can call up a dealer that has the car in stock and get the MSRP. The best bet is to give the dealer your VIN number found on the driver’s side windshield or the door. This is the best way to get the exact MSRP. Any information you may find online or in guides may provide you with a range, but does not take into account any additional features your car may have.

Step 2 – Residual Percentage

The residual percentage is how much the cars value will have decreased. It will provide you with the percentage of depreciation in the future. There are many factors that go into this percentage, such as the mileage, seasonality, life cycle, and much more. There are many guides and online sites that will provide you with the residual percentage; one example being the blue book value. The car manufacturers have calculated these numbers based on historical data. It is critical you use the correct amount of years when finding this percentage.

Step 3 – The Calculation

You will want to multiply the MSRP by the residual percentage to give you the depreciated value. So if a car had an original value of $20,000 and after 5 years a depreciated percentage of 45%--$20,000 x 0.45 = $9,000. If you have the correct starting price, which includes all of your packages, customization, and features then you can calculate a very accurate depreciation value.

Step 4 – Using the Depreciation Value

People use the depreciation value for many things. When you are looking to purchase a new car you want to see the type of depreciation. Some cars have a low depreciation while others will depreciate very fast. If you are interested in purchasing a used car then the depreciation value is needed to determine the used car value. You can use this price to make sure you get a good deal on your car and it is this value that people base their negotiations around.

Step 5 – Car Depreciation Calculators

If you do not want to deal with doing this calculation out yourself, then you can use depreciation calculators located online. These calculators are available on many websites. You enter in the information and in seconds you have the depreciation value of the vehicle. You will need the car price, the age of the car and a future age of the car (if you want to know what the car value will be in a few years).