What's your definition of depreciation?


#1

On threads related to buying or selling, some posters use “depreciation” as a factor in the evaluation. What is your definition of depreciation?
I think the definition as far as these discussions go is how much the anticipated selling price drops.


#2

Like any other valuable asset that can become worn down through normal use, a car loses some of its value each year through general aging and every day wear and tear. This loss in value is known as car depreciation. Depreciation is primarily an accounting tool, rather than an accurate representation of the wear and tear a car receives on a yearly basis.

The rate of car depreciation varies depending on the year, make and model of the car. The first year always sees the greatest depreciation hit against the car’s market value, with most cars losing about 20 percent or more of their original value. The loss continues onward from there, with cars shedding about 60 percent of their original purchase price within the first five years on average. When the time comes to sell your car, you may find that depreciation has greatly reduced the expected trade-in valuefor what could still be a well-functioning, nearly-new automobile.

A car’s trade-in value is the amount of money an auto dealer is willing to take off the purchase price of a new or used car in trade for your existing car. The trade-in amount is based on a number of factors, including the make and model of the car, its age, and its condition at the time of trade. Because of depreciation, the older your car is at the time of trade-in, the less credit toward a new purchase you’re likely to receive. Holding onto your car for longer than average can be a benefit at trade-in time if the vehicle is in good condition, because the rate of depreciation tends to slow after the 100,000-mile point. There are a few exceptions, of course, with very popular car models receiving higher trade-in deals.


#3

I am going to disagree with @COROLLAGUY1 a bit.

I agree that depreciation is the difference between the purchase price and the sale price, or the expected sale price of the car.

The expected sale price does include wear and tear but it also includes other factors. Those factors include how many are being offered for sale and how desirable people find them (or your particular car) as used cars. That is an intangible that can only be accurately determined at the time of sale. If you bought a popular model with great appeal but chose a terrible color scheme without air conditioning or with a manual transmission, the popularity helps and the options hurt the price.

Agree that the first year’s depreciation is the highest and it can be quite large. Subsequent years drop somewhat less each year. By year 5, it is usually flattens out for most cars. It all adds up the cost of owning a car. If you buy a new car for $30K and it loses 45% of its value in 3 years like many Cadillac’s and BMW’s do, the cost of owning that car is higher than losing only 30% of the value of a $30K Toyota. The used car market values a used Toyota more than a used BMW so the depreciation is less. Depreciation is always an estimate based on historical data because you can’t predict what that new model will sell for 5 years down the road. Lease companies estimate it so they can set your payment. They can also over estimate the value to make you payment smaller and move more cars. GM Credit and Ford Credit did this and does this a LOT to sell cars.

Depreciation is only an estimate until someone ponies up the cash for your car.


#4

It’s essentially funny money and has no impact until you sell the car. Just like stocks that may fluctuate in value, you don’t lose anything unless you sell it. But yeah the short answer is that the value of an asset goes down as it ages or is used. For most cars this amounts to about 50% of its new value after five years. If you have a business though its a little more important since you write off depreciation as expenses that reduces income for tax purposes anyway.

This was high school general business where we discussed houses that can appreciate in value but also depreciate as they age. Things like replacing siding, furnaces, air conditioners, carpet, and on and on. Oh I gotta go get some work done yet before winter.


#5

It’s usually the largest cost of owning a car. A lease covers that cost, plus interest and lease company profit.


#6

The primary reason I asked the question is that the depreciation I think of would not be a factor in a buying/selling definition for an individual. Depreciation to me is a business expense; it’s big uses are determining a business’ asset value and as a “write-off” in figuring tax liability. In the business world depreciation is largely defined numerically but not necessarily indicative of its real world value.

Defining it as a loss in selling price of a car makes sense, although it’s largely theoretical as you do not know what you could get for the car without actually selling it.


#7

I buy a car for $30,000, use it for 3 years, and sell it for $14,000. I’m out $16,000. Nothing ‘funny’ or a ‘business expense’ about it.


#8

it does seem people are overthinking this, You buy new car and want to sell it 3 years later, the price is determined by depreciation. Certainly depreciation factors into many financial formulas, but cars are pretty well quantified for resale value less than original purchase value, ie: depreciation. Tell me what I am missing, or what you do not understand.


#9

The IRS dictates how much you can write off each year with depreciation. Sometimes you win sometimes you lose. Business’ like car leases because they can write the lease payments off in the year they were incurred, no messing around with depreciation tables, writing off the residual asset at the end of life etc. If you google ‘irs car depreciation’ you will get a lot of web sites, all use English words but few are understood by the average English speaking person.


#10

OK. You buy a new latest model $1,200 computer needed for your business. 3 years later you have trouble selling it for $500. Same concept.