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Drivers warned over depreciation risk

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Motorists have been urged to consider the risks of depreciation ‒ and the possible impact on their car insurance ‒ before purchasing a new car.

March is traditionally a month that sees a spike in interest in new cars as vehicles with the new numberplates go on sale. 

However price comparison site GoCompare has emphasised drivers need to understand how quickly a new car loses value through depreciation. It noted that values drop dramatically as soon as the model leaves the forecourt, with some cars losing as much as 35% in the first year and up to 50% over the first three years.

The rate of depreciation not only hurts when it comes to buying and selling your car, but it will also impact your insurance.

GoCompare pointed out that insurance claims are typically calculated on a car’s market value at the time of an accident, rather than its purchase price. As a result, if your car is written off or stolen and not recovered in the first couple of years, the rate of depreciation could lead to you facing a significant loss.

What impacts depreciation?

There are plenty of different factors which will influence the rate at which your new car loses its value. 

For example, the make and model will play a big role. The reputation of the car will influence how desirable it remains in the second hand market, while those with an excellent record for reliability and safety tend to retain value better than those with a poor record.

Personalised choices like colour and any modifications you have will also influence its rate of depreciation ‒ there is likely to be more ongoing demand for a black or white car than one which is bright orange or pink, for example.

The fuel type is also worth considering, with GoCompare pointing to the recent cliff-edge drop in the value of diesel engines, while the mileage also influences depreciation. GoCompare notes that the average mileage in the UK is around 10,000 miles a year, and the more miles you drive above this threshold, the faster the car will lose its value.

In addition, depreciation is slower for cars that have been properly looked after and maintained.

Protecting against depreciation

It’s also worth remembering that you can take out a form of insurance which can help reduce the potential damage depreciation can do when making an insurance claim.

Guaranteed asset protection (GAP) is a standalone policy you can purchase alongside your standard car insurance, and is designed to cover the difference between the current market value of your car and what you paid for it. 

Lee Griffin, CEO and founder of GoCompare Car Insurance, commented:  “When you apply for insurance, you will be asked to estimate the value of your car. However, the value you suggest isn’t necessarily what you’ll get back from the insurer if your car is a total loss.  This is because insurers calculate claims based on the value of the car at the time the incident occurred, which will reflect any fall in value.     

“GAP insurance is designed to provide extra cover in the event of your car being declared a write-off after an accident or if it stolen and not recovered.  As with standard car insurance, you should shop around and compare GAP insurance policies online to find the best deal for you.”

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