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Tata Capital > Blog > Loan for Education > Understanding Car Depreciation: How Does It Affect Your Used Car Loan?

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Understanding Car Depreciation: How Does It Affect Your Used Car Loan?

Understanding Car Depreciation: How Does It Affect Your Used Car Loan?

A used car loan can be an excellent way to purchase a vehicle that fits your budget. However, car depreciation is a key factor in determining the loan amount, interest rate, and overall financial planning. Depreciation refers to the decrease in a car’s value over time, directly affecting how much you can secure and its total cost.

This article explores car depreciation, its key factors, and its impact on used car loans.

What is Car Depreciation And How Does It Work?

Car depreciation is the gradual decline in a vehicle’s market value as a result of wear and tear, age, mileage, and overall condition. A common example of car depreciation is when you purchase a new car, and its value immediately decreases as soon as you drive it off the dealership lot. Depreciation is crucial in determining a car’s resale price.

What are the Key Factors that Influence Car Depreciation?

Several factors contribute to a car’s depreciation, including the following:

  1. Age of the car: As a vehicle ages, its value declines because of wear and tear and the arrival of newer models, increasing the depreciation value of a car.
  2. Mileage: The more a car is driven, the more it wears out, reducing its value over time. Higher mileage increases the depreciation value of a car, making it less appealing to buyers and lenders.
  3. Brand and model: Well-known, reliable car brands tend to hold their value better than less-popular models. Lenders prefer cars with lower depreciation.
  4. Condition and maintenance: A well-maintained car with regular servicing and minimal damage retains its value better than a poorly maintained one.
  5. Fuel type: Diesel cars often depreciate faster due to regulations and maintenance costs. In contrast, electric and hybrid cars may retain value better due to rising demand.

What is the Car Depreciation Curve In India?

Car depreciation in India follows standard rates set by the Insurance Regulatory and Development Authority of India (IRDAI). These rates determine a car’s Insured Declared Value (IDV), affecting insurance claims and resale value.

Age of the carDepreciation rate (%)
Up to  6 months5%
6 months – 1 year15%
1 year – 2 years20%
2 years – 3 years30%
3 years – 4 years40%
4 years – 5 years50%

How Does Depreciation Affect Your Used Car Loan?

Depreciation affects several key aspects of a used car loan, such as:

1. Loan Amount, Lender’s Assessment, and Collateral Value

Lenders assess a vehicle’s market value before deciding on the loan amount. Since car depreciation lowers a car’s value, the lender may offer a smaller loan amount compared to the car’s original purchase price.

Additionally, since the car is collateral for the loan, lenders might require a higher down payment.

2. Interest Rates

Used cars with higher car depreciation rates are considered riskier for lenders because their value continues to decline. As a result, lenders may charge higher interest rates for vehicles that lose value quickly. Car loan depreciation can increase borrowing costs if the car has lost value.

3. Loan Tenure And Repayment Terms

Lenders may offer shorter tenures for highly depreciated cars to reduce their financial risk. A shorter tenure means higher EMIs, but ensures the lenders recover their loan amount before the car loses too much value.

4. Loan to Value (LTV) Ratio

The LTV ratio refers to how much of the car’s value a lender is willing to finance. A car with a high depreciation rate typically has a lower LTV, meaning you may need to pay a larger down payment or qualify for a smaller loan.

5. Insurance Costs

As the depreciation value of a car decreases, the cost of insuring it may also decrease. However, if you’ve taken out a loan, lenders may require you to maintain comprehensive insurance coverage, which can impact your loan repayment.

What You Should Consider When Financing A Used Car?

Before applying for a used car loan, keep these factors in mind:

  1. Budget and affordability: Look beyond the loan amount and consider the interest rates, EMIs, and required down payment, whether a used car or a two-wheeler loan. Ensure the loan fits your budget.
  2. Loan tenure: Shorter loan tenures mean higher EMIs but lower interest payments overall. Choose a tenure that balances affordability and cost.
  3. Depreciation rate: Some cars depreciate faster than others. Opting for a lower car depreciation value model can help maintain resale value and loan benefits.
  4. Total cost of ownership: Factor in insurance, upkeep, and operational costs beyond the purchase price.
  5. Lender terms and conditions: Different lenders offer different LTV ratios, interest rates, and eligibility criteria. Compare options before finalising your loan.

Can a Car Appreciate In Value?

While depreciation is the general trend for most vehicles, some rare, vintage, or limited-edition models may appreciate due to their rarity or desirability in the used car market. However, for most vehicles, the depreciation value of a car remains a key factor affecting their worth.

Conclusion

Understanding car depreciation is essential when applying for a used car loan. It impacts not only the loan amount but also the interest rates and repayment terms. By factoring in car loan depreciation, you can make more informed decisions about your used car purchase and financing options.

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FAQs

What causes car depreciation?

Car depreciation happens due to age, mileage, wear and tear, and market demand. Some models depreciate faster because of lower demand or higher maintenance costs.

Can my car appreciate in value?

While most cars lose value, some rare, limited-edition, or vintage cars may appreciate due to increased demand and collectability.
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