How Car Depreciation Impacts on Your Car loan

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Car Depreciation When you look for a car, one of the most important factors is the depreciation. Whether you take out a car loan, the falling value of the vehicle is a major factor in the deal you get. Whether this loan is through the dealer or from a 3rd party such as a bank, depreciation is something you should consider before signing on the dotted line.

Car Depreciation - what does that mean?

Over time, your car will be worth less. This is down to the wear and tear, mileage and the fact that newer models have come out. There are different parts to the depreciation of your car.
Market depreciation is the falling value based on what the market is doing. If people don't want the type of car that you own, then the market price drops. If the manufacturer brings out a newer model then your older car will automatically see a drop in the price. You can look at how your car has kept value in the past as a good indication of the future likely value.
General depreciation is linked to how well you look after the car. As soon as a new car leaves the showroom, it loses a massive amount of its prestige – and therefore value. Then if you keep it well-maintained and looking great it will not lose as much value in subsequent years as it would if you didn’t take care of your vehicle. Depreciation can be tracked and monitored so you don't end up with a surprise at any stage of your ownership, particularly if you want to sell.

So, what does depreciation mean for your car loan?

You have two factors at play here:

  1. Your car will be worth less with every passing month
  2. Your loan payments will remain the same over the term of the loan

So, you borrow money based on what you can afford to pay back each month. The loan is not connected to the value of the car over time. You end up paying off the same amount at the end of the loan period, even though the car will be worth far less than when you started. Once the value is lost, you may end up paying off a car that owes you money.

At this point you are known to be "under water" with the car loan – the point in time where the sale of the car would not cover the remaining balance on the loan. But if you take depreciation into account, then you can mitigate against this.

How to mitigate against Car Depreciation within a Loan Agreement

As you can see from the above, you don't want to end up in a situation where you have a car that is worth less than you need to pay back. There are ways of making sure you don't end up stuck like this. A bigger down payment at the start of the loan is a great idea and will help you to avoid this situation. Also, keeping the payments to a much shorter term will help too. This keeps the loan at a closer level to the value of the car. You don't want to end up "under water" and these tactics will help you to achieve that.

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