Most people know that if they buy a brand new car at a showroom in Newark, New Jersey and drive it to their home in Livingston, their brand new vehicle starts to depreciate. While it might not seem fair that just driving back and forth to your job in Montclair can devalue your car by twenty percent after just one year of ownership, such are the facts of life.
There are two reasons why you should worry about how fast your vehicle loses value. First, depreciation can affect the price you can get if you ever want to sell or trade-in your car. A second, and less well understood reason why depreciation matters so much relates to your auto insurance.
When you go to buy auto insurance, the rates you pay are not based on the purchase price of your vehicle. They are based on the depreciated value of the model year and type of car you drive. Insurance companies use industry data to calculate depreciation. Depreciation is the difference between the cash value of a car when it was brand new and what you could sell it for today.
For example, if you have a three year old truck that you paid $30,000 for when you bought it new, that truck might only have an insurable value of $20,000. The $10,000 difference is depreciation based on such things as age, mileage and condition.
Since cars depreciate at a greater rate when they are newer, most insurance companies do not use straight-line depreciation (depreciating the vehicle the same amount each year). Instead they use an accelerated method to calculate depreciation on your car.
If you have an accident and need to file a claim, the most you can hope to collect for damages to your car is the depreciated value. Even though you may value your car much more than that depreciated amount, you are usually not in a strong position to get the insurance company to raise the amount they are willing to pay on a claim.
For more information on depreciation and how it can affect both your auto policy premium and the amount you may receive when you file a claim, please give us a call. An independent agent will be happy to discuss depreciation and any other auto insurance questions you may be looking to have answered.