Vehicle Depreciation Rates: Meaning & Impact on Car Insurance Premiums
Car depreciation rates are among the most important factors insurance companies consider while estimating car insurance premiums.
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What is Vehicle Depreciation?
Vehicle depreciation, or car depreciation rate, is the loss of the value of a car over the years. This is because of vehicle aging, mileage, and the usual wear & tear. As soon as you take a vehicle out of the showroom, its market value starts declining. Depreciation is driven by age, usage, wear and tear, market demand, and vehicle type (internal combustion vs electric).
How is the Vehicle Depreciation Rate Calculated?
The calculation of the vehicle depreciation rate is simple. Here is the formula:
Vehicle Depreciation Rate = ((Vehicle's Original Cost- Current Market Value) / Original Cost) x 100
So, for example, you own a car with the original price of Rs. 15,00,000, and the current market value of Rs. 12,00,000.
In this case, the motor vehicle depreciation rate will be:- ((15,00,000 - 12,00,000)/15,00,000) X 100, which is 20%.
If you match this car depreciation rate as per the standard fixed by IRDAI (Insurance Regulatory and Development Authority of India), your four-wheeler comes about 2 to 3 years old.
Another method to calculate the car depreciation rate is through the depreciation calculator, which will help you determine the Insured Declared Value (IDV) value for your car.
What is the Vehicle Depreciation Calculator?
A vehicle or car depreciation calculator is an online tool that lets you estimate your car's market value, which directly impacts the car insurance premium. With the help of this calculator, you can determine your car's depreciated value after it has been used.
To know your vehicle's market value using this online tool, you can visit the car depreciation rate calculator page on Policybazaar.com and follow these steps:
- Enter your vehicle's registration number.
- Select its make & model, variant, fuel type, RTO, and registration year.
- Once you click 'Check IDV,' your car's recommended IDV will be displayed.
Standard Depreciation Rates for Vehicles as per IRDAI
The table below highlights the car depreciation rates in India set by IRDAI. Have a look:
| Age of the Vehicle |
Vehicle Depreciation Rate |
| Less than 6 months |
5% |
| 6 months - 1 year |
15% |
| 1 - 2 years |
20% |
| 2 - 3 years |
30% |
| 3 - 4 years |
40% |
| 4 - 5 years |
50% |
| Over 5 years |
Decided by insurer and vehicle owner as per market value |
What Factors Influence the Vehicle Depreciation Rate?
Here are the key factors that affect the depreciation rate for vehicles. Take a look:
- Vehicle Cost: The most obvious factor that affects the vehicle depreciation rate is the price of the vehicle. Higher-priced four-wheelers suffer more depreciation than the economical models.
- Age of the Vehicle: The older a vehicle gets, the more its value is reduced.
- Make & Model: Popular brands usually have high resale value because of their increased demand. Hence, it leads to a slower vehicle depreciation rate. Unpopular or limited edition cars depreciate faster.
- Distance Driven: Higher mileage leads to more wear & tear, consequently, faster depreciation.
- Vehicle Condition: If a car is not maintained properly, it will experience higher depreciation rates.
- Driving History: Generally, the vehicle depreciation rate will be higher if it has a history of accidents.
Impact of Vehicle Depreciation on Car Insurance Premiums
The car depreciation rate has a direct impact on the car insurance premium amount. The policy premium for vehicle insurance is calculated with the IDV, which is the maximum amount your car insurance company gives in case of total loss or theft of the insured four-wheeler.
A car's value decreases over time, and so does its IDV. Thus, it results in a lower car insurance premium and smaller claim amount settlements. Moreover:
- Since the depreciation lowers the original value of the vehicle & its parts, the car depreciation rate affects the reimbursement amount for vehicle repairs.
- Any car insurance claim for the replacement of metal or rubber parts is settled after factoring in the vehicle depreciation rate.
- With the increased depreciation rate for cars, the out-of-pocket expenses also increase.
Is the Electric Vehicle Depreciation Rate the same as that of a Fuel-Based Car?
Petrol and diesel cars depreciate at a fixed percentage, which is set by the IRDAI. Hence, as of now, the motor vehicle depreciation rate for both fossil fuel-based and electric cars is the same.
But, the main concern is the EV battery, which is the most important and costly part. The longevity of an EV battery (8-10 years) is much lower than that of a car's engine (about 10-15 years). However, it is typical of what you can expect from an electric car. As a result, there are questions regarding the uniformity in the electric vehicle depreciation rate at present.
Moreover, electric car insurance prices can also differ. Third-party premiums for EVs are based on their battery capacity. But the comprehensive insurance price also includes Own Damage (OD) premiums, which may be higher for EVs because of expensive battery repair and replacement costs. Thus, EV owners should keep these factors in mind while choosing an electric car insurance policy.
Maybe in the future, the depreciation rate specific to EVs might be introduced by IRDAI for EVs once the EV market matures and depreciation data becomes available. But, till then, it remains the same as that of fuel-based vehicles.
Some Tips to Slower Down Car Depreciation Rate
While the depreciation on a car cannot be stopped, you can slow it by following these tips:
- Regular Maintenance: Keep your vehicle well-maintained with routine servicing from authorised service centres. Maintain service records and try getting the damages repaired promptly to avoid wear & tear.
- Zero Depreciation Car Insurance: To receive the entire value in case of a claim, without the depreciation deduction, you can opt for the zero depreciation add-on cover in car insurance.
- Protect Vehicle Interiors & Exteriors: Use seat covers, have your car's paint protected, keep your tyres safe, and always park in safe spaces.
- Consider a High Resale Value Car: Another tip to slow the vehicle depreciation rate is to buy a car with good resale value. Opt for common colours, popular & reliable brands, and fuel-efficient models.
In a Nutshell,
Depreciation is unavoidable - every vehicle loses value over time. But by understanding the car depreciation rate and choosing the right add-ons, you can lower its impact on both premiums and claim payouts with your car insurance. Whether you drive a petrol, diesel, or electric vehicle, knowing its depreciation rate can help you make smart choices when purchasing or renewing a four-wheeler insurance policy.
