Category: Financial Planning

How will I evaluate the current and future value of my car?

To own a good car is the dream of every individual, which is why buying a dream car or upgrading the current one to a better model always comes up as a high priority goal of an individual while doing financial planning.

But most of the times, in the excitement of getting our dream car, we tend to neglect a lot of factors like – the value of currently owned one, the value of the new car after certain years or how much should be its resale value, whether the service cost is at par with the other models in the same category etc.

Among these questions, the value of the current car plays an important role, as it influences the funding for the new car which indirectly affects your financial stability. So how do we value our current car now and the future value of the new one?

Valuation

The car which you currently own is included in your assets while calculating your net worth. The car falls in the category of assets for which the value depreciates as it becomes older. So, as it is a depreciating asset, the valuation of the asset is done using the depreciation model. The commonly used depreciation model to evaluate the cars are declining balance depreciation method.

Declining depreciation method

This is the commonly used method in India to evaluate the value of cars. In this method, a certain percentage is deducted from the beginning book value of the car every year. This method is commonly followed by the insurance companies as well as the income tax authorities to evaluate the current value of the cars.

CALCULATION

The formula to calculate the value of the car as per this method is

Value of the car = Beginning book value of the car X % of depreciation for the particular year

But, the Income Tax authorities and the Insurance companies value the car in different ways. The IT authorities use a straight slab rate for every year while the Insurance authorities use a differential rate for each year.

As per the IT Act, the depreciation take for motor cars are 15% every year. So as per this method if you have purchased a car for Rs.10,00,000 today, the value of that car after 5 years will be Rs.4,43,705.

 Years 0 1 2 3 4 5 Beginning book value of the car ₹ 10,00,000 ₹ 8,50,000 ₹ 7,22,500 ₹ 6,14,125 ₹ 5,22,006 ₹ 4,43,705 Depreciation every year ₹ 1,50,000 ₹ 1,27,500 ₹ 1,08,375 ₹ 92,119 ₹ 78,301

The Insurance companies uses this method to find out the IDV (Insured’s Declared Value). The most commonly used slab rates by the insurance companies are

 Age of the car Percentage depreciation (for calculation of IDV) Less than 6 months 5% More than 6 months but not exceeding 1 year 15% More than 1 year but not exceeding 2 years 20% More than 2 years but not exceeding 3 years 30% More than 3 years but not exceeding 4 years 40% More than 4 years but not exceeding 5 years 50% More than 5 years The IDV is calculated based on a mutual agreement between the insurer and the policyholder.

In this method the value of the value of a car purchased for Rs. 10,00,000 after 5 years will be Rs.1,42,800.

 Years 0 1 2 3 4 5 Depreciation percentage 15% 20% 30% 40% 50% Beginning book value of the car ₹ 10,00,000 ₹ 8,50,000 ₹ 6,80,000 ₹ 4,76,000 ₹ 2,85,600 ₹ 1,42,800 Depreciation every year ₹ 1,50,000 ₹ 1,70,000 ₹ 2,04,000 ₹ 1,90,400 ₹ 1,42,800

This price may vary depending on the claims availed on the insurance policy and the no-claim bonus.

Other Factors

There are a lot of other factors also that influence the valuation of the cars as described below:

Physical condition

A well maintained vehicle fetches a higher valuation. This depends on the maintenance of the car, the frequency on which the regular services are done, the physical appearance of the car and other factors used to improve the physical condition of the vehicle.

Driveability Condition

The driveability of a vehicle means the ease to drive it and the other factors like any noise from engine, suspension, underneath, cornering, speed lag, glitches in driveability etc.

Car functions

The car functions means the value added accessories which are available along with the car like smart keys, Anti-theft systems, Central locks, AC, Power Window, Power Steering, Light options etc. The variant of the cars also influence the valuation of the car, a higher variant fetch a higher value than a base model.

Service History

The service history is a very important factor that influences the valuation of the car. The service history shows that, are the schedule services done on time, Is the service carried in an authorised service centre, does the vehicle has a well maintained service history data available with the authorised service centre etc.

Accidental History

The accident history of the car has to be checked while valuating the car. This can be checked from the insurance history, the number of insurance claims in a period and the police records. It is also ideal to check that the any parts has been changed after the accident and the services are done in an authorised service centre, this also influence the valuation of the car.

Mileage

Mileage means how much Km the car has been driven. The lower the mileage the higher valuation. You can also do a comparison of mileage with the year of manufacturing. In India the fuel of the car also influence the valuation of the cars the diesel car fetch more valuation in the earlier years than the petrol cars.

Vehicle Model in Production

The vehicle model in production means, is the model currently produced by the manufacture and available in the market for sale. The production models will have higher valuation as the availability of spare parts and servicing are easy. This may change in case of the collection cars.

Ownership

The ownership of the car also influence the valuation of the car. If the car is transferred to multiple owners in a short span of time will reduce the valuation of the car, likewise the valuation of the car is also influence by number of owner you are like 1stowner, 2nd owner etc.

Conclusion

When it comes to the valuation of cars in the secondary market there is no hard and fast rule as it is influenced by lot of other external factors too. Most of the valuation of the cars in India happens in a qualitative as well as physiological method rather than a quantitative method. Currently there are lot of valuation companies available in the market who do proper valuation for the car and certify them. The easiest and the common way that and individual may follow to evaluate his car is to check the IDV of the car and value it more than the IDV.

Ranjith

Dilzer Consultants Pvt Ltd

Reference:–

https://www.bankbazaar.com/insurance/motor-insurance-guide/how-is-car-insurance-Insureds-declared-value-calculated.html

http://taxadda.com/handbook/depreciation-rates-income-tax-act/

Reference from some secondary market car dealers.

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