This free online Car Depreciation Calculator will calculate the annual, total, and lifetime depreciation costs of buying a vehicle. You just might be shocked at how much these depreciation costs add up over the course of your lifetime -- not too mention how much of your potential future wealth will be forfeited in the process.
If you would like to estimate all costs associated to buying and owning a vehicle (depreciation plus tax, license, finance charges, gasoline, insurance, maintenance, repairs, etc.), be sure to visit the Car Buying Calculator.
When you purchase a car you are actually trading one asset (cash) for another asset (automobile). At the time of the trade it's presumed that the value of the cash traded away is equal to the value of the automobile the cash was traded for. In other words, no expense should actually occur at the time of the trade (if only that were true in all cases).
An expense occurs as the value of the automobile drops below the value of the cash that was traded for it. This drop in value is referred to as "Depreciation." But since there are numerous unknown variables that come into play when estimating the cost of depreciation, the only time you will be able to determine the exact size of the expense, is when you actually sell, trade, or scrap your vehicle. Only then will you know for sure just how much your automobile dropped in value since you purchased it.
As to what variables are "unknown," they would include variables such as the economy, the price of gasoline, the number of miles you drive your car, the condition of the car, and the demand for the particular make and model of the car.
Considering all of these unknowns, the goal of the car depreciation calculator is not to calculate the exact amount by which a car will drop in value. Instead, the goal of the car depreciation calculator is to provide you with a means to compare depreciation costs for various car buying scenarios, and to show you how these costs, plus the forfeited potential future wealth, can add up over the course of your lifetime.
Earlier I said that when you trade cash for an automobile it's presumed that the value of the automobile is equal to the value of the cash that was traded for it. In reality there is only one buying scenario where that presumption would be somewhat correct -- a scenario wherein you purchase the car from an individual.
If you purchase a used car from a car dealer, the value of the automobile will instantly drop in value the moment you drive the car off the lot. That's because the auto dealer marked up the value of the used car to include a profit margin. If you want to know just how much that drop is, immediately drive your just-purchased car to a competing dealer and ask how much cash they'd be willing to give you for the car. But wait, that drop in value is nothing compared to the drop in value you will experience if you purchase a "new" car.
When you purchase a "new" car, the "new" car instantaneously becomes a "used" car! So not only will the car's value drop by the amount of the dealer's profit margin, but it will also plummet by the drop in the perceived value ("used" is far less appealing than "new"). All together, this warp-speed depreciation that occurs the moment you drive a "new" car off the lot can run in the 10-30% range. Ouch!
Now if you add to that the fact that cars depreciate faster in their early years and slower in later years, buying a "new" car every 1-3 years will cost you a fortune in hyper, warp-speed depreciation (test these types of scenarios in the car depreciation calculator and you will see what I mean).
Most financial "experts" will tell you that the key to getting the most value out of your exchange of cash for an automobile, is to purchase an automobile that has a low (slow) rate of depreciation. What's wrong with that advice? Well, considering that the cars that have the lowest depreciation rates also have the highest sticker prices (BMW, Mercedes Ben, Porsche 911, Lexus, etc.), any depreciation costs you save will be largely offset by the increased price of the car and higher insurance premiums.
If you really want to lower the depreciation cost of owning a vehicle, the key is to either buy a new car and hold on to it for a long period of time (say 8-10 years), or to buy a slightly used car often enough to avoid the costly repairs that can come with heavily used vehicles.
With that, let's use the Car Depreciation Calculator to calculate the annual, total, and lifetime depreciation costs of owning a vehicle.
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Purchase price of car: The purchase price of the car you are considering for purchase.
Vehicle's age in years: The current age of the vehicle in years. If the car is new, enter a zero.
Years you plan to own vehicle: The number of years you plan to own the vehicle.
Number of years to calculate lifetime costs: The number of years you expect to repeat the buy-sell/trade cycle. The Car Depreciation Calculator will use this figure to estimate your total depreciation and opportunity costs between now and when you no longer need a vehicle.
Expected percent return on investments: The annual percentage return you would expect to earn on your investments. Enter as a percentage (for .06, enter 6%). The Car Depreciation Calculator will use this figure to estimate your total opportunity cost between now and when you no longer need a vehicle.
Year %: This row contains the default year-to-year depreciation rates used by the Car Depreciation Calculator. Feel free to change the rates as you see fit. Enter as percentages (for .28, enter 28%). Just make sure that the YTD % in Year 10 is less than 100%. Also, keep in mind that the figure entered in Year 10 will be repeated for every year after if you will keep the vehicle past the point when the car turns ten years old.
YTD %: This rows shows the accumulated depreciation rates from the row above from now through each column year.
Final vehicle age in years: This is how old the car will be once you are ready to sell, trade or scrap the vehicle.
Depreciation cost: This is the total depreciation cost for the number of years you plan to own the vehicle.
Resale value at end of ownership period: This what the vehicle will be worth when you are ready to sell, trade, or scrap the vehicle.
Average annual depreciation percentage: This is the average annual depreciation percentage. To arrive at this figure, the car depreciation calculator divides the total depreciation cost by the number of years you will own the vehicle. Typically, the newer the vehicle you purchase and the more often you purchase newer vehicles, the higher will be the annual depreciation cost percentage.
Average annual depreciation cost: This is the average annual depreciation cost (total cost divided by number of years owned). The newer the vehicle you purchase and the more often you purchase newer vehicles, the higher will be the annual depreciation cost.
Lifetime depreciation cost: This will be your lifetime depreciation cost if you continue to purchase vehicles in a fashion similar to this vehicle (price, age, years of ownership). If you want to lower this cost you will need to either purchase newer vehicles less often or switch to purchasing used vehicles often enough to avoid the major repair costs that come from holding on to vehicles too long.
Forfeited future value (opportunity cost): This is the estimated future value of your investments if you invested the average annual depreciation cost. Since most of us need a car, there is no way to completely eliminate this lost future value, so the goal should be to try to reduce it as much as possible. If you want to lower this cost you will need to either purchase new vehicles less often or switch to purchasing used vehicles often enough to avoid the major repair costs that come from holding on to vehicles too long.