Why you should be careful about car depreciation

You may have heard before that cars are terrible investments. The reason for people saying that is because the vast majority of cars depreciate or lose value, as soon as you buy them. A car is a machine with lots of moving parts prone to breaking down. On top of that, the car you are driving this year will have a newer and more improved model the following year. Essentially there are only a handful of cars that gain in value, and those are classic or collector cars. For most other people, your cars will depreciate, and that can have implications on your car insurance.

Depreciation Is an Important Factor When Your Car Is Totaled

When you "total" a car, it means that it would take more money to repair the car than what it is actually worth. Totaling your car is a big deal, as it means your insurance company will have to pay you the full amount of the value of your car (if you have collision insurance). The full amount they pay you though depends on how much your car has depreciated. When you total a car you are paid the 'actual cash value'. So even if you bought your car for $50,000 three years ago, it is likely worth several thousand dollars less. As a driver and policyholder, you need to be aware that your insurance company will only pay you the actual cash value.

Our advice would be to keep track of the value of your car throughout your time of owning it. The actual cash value is determined by your company's claims adjuster, but if you are keeping track of your cars value, you may calculate the value differently. Insurance companies will always try to reduce how much they want to pay, so the claim adjuster's actual cash value number is likely going to be conservative. If you feel the amount you are being offered is lower than your calculations you may negotiate.

Depreciation is a Reason You Should Get Gap Insurance

When you lease or finance a car, your payments reflect the cost of the vehicle when it's brand new. Due to depreciation however, you end up paying more in the loan or lease payments that what the car is actually worth when you're done with your payments. This is a problem if you total your car. As we say above, if you total your car, your company will only pay you a fraction of what the car was worth when you first bought it. If you owe still several thousand dollars on your lease or loan, the amount you receive back from your company may not be enough to cover that amount. This is called the 'gap'. It's the reason why we recommend if you lease or finance your car, you get gap insurance. Being 'upside down' on your car payments, as in, your car is worth less than what you owe, can end up costing you thousands of dollars while gap insurance can cost you less than $100 per year.

Classic Car Insurance and Depreciation

If you own a classic or collector car, the opposite of depreciation is what you actually have to worry about. When a car starts to gain in value as time goes on, the car is considered a collectable or a classic. Late 1960's muscle cars are one example. You cannot insure a classic car with regular insurance because its value is going up, and thus your insurance would have to pay more than what you've paid them if it were totaled. You would need classic car insurance. With classic car insurance, you take the actual cash value of the car at the time of getting your policy and that will be the amount your car will be insured for, for the duration of the policy. In a way it is the opposite of the gap for leasing a car. Again though, you should keep careful track of your cars value so you always know if an insurer is low balling you on the value of your car.

This story originally appeared on ValuePenguin.