4 Facts to Know on Calculating Diminished Value
Whenever you are purchasing and eventually own a real asset, you likely will want to keep it in as good condition as possible. Keeping an item in good condition is very beneficial as it will help to retain the value of the underlying asset. This is especially true when you are purchasing an asset, such as a car, that you someday may want to sell to another person.
If you own a vehicle that has been involved in an accident, you could see the value of the vehicle decline. In the automotive industry, the term for the amount of value that a car can lose after it is in an accident or is otherwise damaged is diminished value. The term and concept of diminished value is extremely important when it comes to reselling a vehicle and to insurance. If you are trying to calculate the diminished value of your vehicle, you will need to take a variety of factors into consideration.
1- Understand Why it is Important
When you are looking to calculate diminished value of a vehicle, it is important that you first understand why knowing diminished value of a car is important. Diminished value is essentially the amount of money that someone would be willing to pay for your car after they find out it has been in an accident. Since a car that has been in an accident poses a little bit more risk than a car that has not been in an accident, it will always be worth less. This is even the case if the vehicle was repaired through the necessary processes.
For example, if you purchased a car for $20,000 and it was involved in an accident, someone may only be willing to pay you $15,000 for the same vehicle. The lower amount of the value of the car is the diminished value after the accident has occurred.
2- Who Uses Diminished Value
While it is important to understand what diminished value is, you should also understand who uses diminished value and for what purposes. Companies that purchase vehicles from individual sellers will often use diminished values as a means for determining the fair market value of the vehicle. You are required by law to be honest about any accidents that you have been in and this accident information could be used by the purchaser to try to buy it for lower value.
Auto insurance companies will also use the diminished value concept in many of their calculations and risk management processes. When you are applying for a new auto insurance policy, the company will try its best to understand the current diminished value of your vehicle based on the age of vehicle, overall condition, and accident history. This will have the direct impact on the auto insurance coverage and rates you receive.
3- Base Loss of Value
One of the main factors that will be used to determine the diminished value of your vehicle is the base loss of value. This value component is essentially a bottom amount of value that your vehicle can be worth. Even if your vehicle has been in a variety of very bad accidents, it still has some level of value in the open marketplace. This value can be as low as 10% of the value of a vehicle that is still in good condition. It is often used as a baseline to start the process of determining the overall value of the vehicle today.
4- Other Factors
When you are looking to determine the value of a vehicle using the diminished value concept, there are a variety of other factors that will be taken into consideration as well. One of the most important factors will be the mileage component. Beyond accidents, standard expected depreciation is also a factor involved in the diminished value calculation. If your vehicle has been driven a lot, its diminished value will be lower than a vehicle that does not have many miles on it.