Depreciation

Depreciation is the reason a car is worth less the afternoon you buy it than it was that morning. The cause is age, mileage and wear, and the fact that a buyer pays less for a used thing than for a new one; the effect is an asset whose recorded value has to be marked down each time it is checked. Depreciation is a real cost of owning a thing, paid not in a monthly bill but in the gap between what it cost and what it would sell for, which on a $32,000 car is $17,000 over five years, or about $280 a month that no statement ever shows. The tax sense of the word, a business deducting the cost of equipment over the years it is used, is a different thing; the everyday sense is the one that reaches your net worth.

In a sentence

• "Depreciation took $6,400 off the car in the first year alone, more than the interest on the loan will cost in five."
• "A house usually appreciates. A car, a laptop and a couch only see depreciation."
• "The loan is fixed and the car isn't. When depreciation runs ahead of the payments, you're underwater."

How it works

Depreciation is measured by the market, not by a formula: an asset's value at any moment is what a buyer would pay for it then, and depreciation is the fall in that figure from one reading to the next. It is steep, then flat: a new car loses the most in its first year, when it stops being new, and less each year after.

1. Record the asset at what it would sell for today, from a pricing guide's private-sale figure for a car, never at what was paid.
2. Check the value on a schedule, once or twice a year for a car, and mark it down to the new figure. The difference is the period's depreciation, the cost of having owned the thing for that stretch.
3. Keep the loan on its own line. It falls by the principal in each payment while the car falls by its depreciation, and the car's contribution to net worth is the difference.

Depreciation for the period = value at the start − value at the end

An example

A car bought new for $32,000, valued at the end of each year. The example assumes it loses 20% in the first year and a smaller amount each year after.

Over five years the car costs $17,000 in depreciation, more than half its price, and $6,400 of it lands in the first year. Set against a $28,000 loan at 6.9% over 60 months, the example's other assumption, depreciation is the larger cost of owning the car: the loan's total interest is $5,187. With $4,000 down, the balance after the first year is $23,143 against a $25,600 car, $2,457 of margin; with nothing down it would be $26,449, and the car would be worth $849 less than the loan.

Why it matters

Depreciation is the cost of ownership that never appears as a bill, and it is largest on the purchases people finance longest. It changes what to buy, since a car a few years old has had its steepest year paid by someone else and a cheaper car loses less in dollars, and how to finance it, since a loan that outlasts the fast-depreciation years is underwater for most of its life, and a car sold or wrecked in that stretch leaves a balance with no car behind it. The mistake the term prevents is carrying an asset at its purchase price, which shows no cost until the car is sold or updated and then the whole loss at once.

Depreciation versus appreciation

Appreciation is the opposite movement: an asset worth more at the end of a period than at the start. A home in a rising market and a brokerage account in a good year appreciate; a car, a phone and a sofa depreciate; cash does neither. Both reach net worth the same way, by marking the asset to today's value. The difference is reliability: depreciation on a car is close to certain, while appreciation on a home is usual over long periods and reverses in some years, which is why the market's part of home equity is recorded rather than counted on. See What counts as an asset and a liability for the rule that values every asset at what it would sell for today.

Common questions

Is a car a depreciating asset or a liability? A car is an asset, at what it would sell for today, and a depreciating one, because that figure falls every year. The loan on it is a separate liability, at its remaining balance, and the two are listed separately so that the difference, the car's contribution to net worth, is visible even when it is negative.

Does depreciation count as a loss if I never sell? It is a real fall in what you own, and net worth records it whether or not the car is sold, because every asset counts at today's value. The loss was paid in the price and becomes visible each time the value is updated.

How fast does a car depreciate? Fastest in the first year, when it stops being new, and more slowly each year after. The rate depends on the model, the mileage and the condition, so a pricing guide's private-sale figure for your own car, checked once or twice a year, is the number to use rather than a rule of thumb.

Does depreciation reduce my taxes? Not on a car or anything else you use personally. In the tax sense, depreciation is a deduction that spreads the cost of an asset used to earn income, business equipment or a rental property, over the years it is used.

Go deeper

• Why your net worth drops when you buy a car follows the day-one drop and the two years after it, when the loan is paid down faster or slower than the car loses value.
• What counts as an asset and a liability puts the car and its loan on separate lines and says what value to use for each.
• The Loan calculator estimates the monthly payment on a car, personal or student loan, the total interest over its life, and how much sooner it ends if you pay a little extra each month.

Where it shows up in Zypper

Zypper keeps the car and the loan on separate lines and charts the result. The car is a manual account whose balance you set to its resale value and update when the value changes, while an auto loan connects like other loans and contributes its balance to the liability side of net worth, updating as payments post; the net worth page nets the two with every other account and charts the total over time, so the day-one drop shows as a step and the principal payments as the slow recovery after it. See Manual accounts and Supported account types, or get started with Zypper to see the car and the loan side by side.