Depreciation

Meaning and Definition

Depreciation refers to the decrease in the value of an asset over time. In the context of car finance, depreciation specifically refers to the decline in the value of a vehicle as it ages and accumulates mileage. Cars, like any other asset, tend to lose value due to factors such as wear and tear, market demand, technological advancements, and changing consumer preferences.

Why it is important to know

Understanding depreciation is important in car finance because it directly impacts the value of the vehicle and its potential resale or trade-in value. Cars depreciate rapidly, especially during the early years of ownership. Being aware of depreciation rates can help you make informed decisions when choosing a car to finance, considering the long-term cost of ownership, and estimating the potential equity or loss you may have when it comes time to sell or trade in the vehicle.

Example in car finance

Suppose you finance the purchase of a brand-new car for £30,000. Over the next three years, the car depreciates by an average of 15% per year. At the end of the three-year period, the car's value would have decreased by £13,950, resulting in a market value of £16,050. Understanding depreciation allows you to assess the financial implications of owning the car over time and plan accordingly.