How Depreciation Affects Car Leasing and Financing

Devaluation is a term used to describe the reduction in the value of an asset over time. Age and distance traveled are key factors in determining a car’s rate of depreciation and can have a significant impact on the vehicle’s Residual Value.

In a Car Lease agreement, the depreciation of your vehicle is a crucial factor in determining the cost of your Installments.

Why is devaluation important?

When renting a car, monthly installments are calculated based on the estimated cost of devaluation during the contract, in addition to financial interest.

The cost of depreciation is the difference in value between the vehicle’s price at the beginning of the contract and its residual value.

If your vehicle has a high depreciation rate, the difference in value will be greater and your installments will be higher.

How to calculate depreciation

The estimated depreciation of your vehicle is calculated by the lender at the beginning of the contract, taking into account the length of the term and the annual mileage limit, so it is important to consider these factors carefully.

Opting for a higher annual mileage limit will increase your vehicle’s depreciation rate, resulting in higher monthly installments.

However, it is essential to be realistic about your mileage, as going over the limit will result in an exceeded mileage fee (typically a few cents per mile) to cover the additional loss in value.

The condition of your vehicle is also key in determining depreciation. If you return the vehicle with damage that goes beyond the lender’s “acceptable wear and tear” policy, it will affect the vehicle’s resale value. As a result, you will likely be responsible for the cost of repairs.

Can I avoid devaluation?

In most cases, devaluation is inevitable. Antique Vehicles are the only exception to the rule, as when they reach a certain age they begin to appreciate.

However, while depreciation cannot be completely avoided, you can reduce the cost of depreciation by choosing a car with a lower depreciation rate.

For example, a zero kilometer car loses about 60% of its value in the first 3 years, and this loss in value will be considered in your monthly installments. However, used cars have a better ability to hold their value, so the cost of devaluation will be less.

Another option is to choose a Hire Purchase (HP) contract, in which your monthly installments cover the entire cost of the vehicle, not just depreciation.

At the end of the HP contract, the vehicle is yours to keep or sell. But keep in mind that the vehicle will still depreciate throughout the lease and will be worth less when you sell it.