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Used Car Valuation and Its Impact on Insurance

Team AckoApr 30, 2024

With the ever-increasing sales of cars in India, the used car market has become extremely competitive. As a car owner, you should know the current market value of your car, and this piece of information will help you while buying car insurance or selling the vehicle. Knowing the exact value of your car will garner you the best price while selling your car. Read on, as this article will help you understand the importance of Used Car Valuation and its impact on Insurance.

Contents

What is Used Car Valuation?

Whenever you buy/sell a second-hand car, you need to know the exact market value of the vehicle. Without knowing the proper value of the used car, you might not get the best price while selling/buying a second-hand vehicle. So, second-hand car valuation is important if you want to sell/buy a used car.

Second-hand car valuation or old car valuation is nothing but the process of determining the accurate value of the vehicle. Several factors such as depreciation, accident history, service history, make/model and the mileage affect the value of the second-hand car. The older the car, the more the depreciation, and hence the value also decreases with an increase in depreciation. When it comes to car insurance, the value determined after the used car valuation is called IDV or Insured Declared Value, whuch can easily be calculated using any IDV calculator.

IDV is the approximate market value of a vehicle which is calculated after taking into account the above-mentioned factors. IDV is very important in car insurance because it is also the maximum sum insured amount. IDV determines the worth of your second-hand car, and you should always declare the correct value of your second-hand vehicle. Refer to the table below for the rate of depreciation levied on used cars:

Age of the Vehicle	Deprecation for IDV (In Percentage)
Up to 6 months	5
6 months to 1 year	15
1-2 years	20
2-3 years	30
3-4 years	40
4-5 years	50

Impact of Used Car Valuation on Car Insurance:

When it comes to car insurance, knowing the accurate value of a car is extremely important. The car insurance premium is calculated depending on the value of the vehicle. In other words, the IDV of the vehicle determines the premium of the car insurance. That is the reason why factors such as depreciation, accident history and mileage become crucial while buying a car insurance policy for your second-hand car.

It doesn't matter if you are looking to sell a used car or buy a second-hand car. The old car valuation has its implications on motor insurance. Below is the impact of second-hand car valuation on insurance under different scenarios:

1. If you are a Seller:

If you under-price the car to reduce the car insurance premium, you will miss out on the profits that you can earn in the long run when you sell the car. Another disadvantage of under-pricing a car is that you will receive a lower claim amount due to the lower value declared in the insurance plan. You will be in loss if your car suffers a total loss or gets stolen.

Similarly, overpricing your car is also a bad practice. Remember IDV affects the premium of the car insurance. Now, overpricing will result in higher car insurance premium, and there are chances that you may not get the same claim amount if the vehicle gets stolen or suffers a total loss. Apart from that, you will have a hard time finding buyers for an overpriced car. So, always declare the correct value of the car, be it while buying insurance or selling the car.

2. If you are a Buyer:

When buying a used car, always check whether the car has a Comprehensive Car Insurance Plan or Third-party Car Insurance Plan. Also, do check the IDV in the insurance certificate to determine whether the owner has declared the correct value of the car.

Sometimes, used car owners deliberately decrease the IDV while buying car insurance. It might be profitable on a short-term basis. But it might be a problem for you when applying for a damage/total loss claim. Because of the incorrect declared value, the insurer will not pay you the actual value of the car.

3. Transfer of Car Insurance Policy:

While selling a second-hand car, if the vehicle has an active car insurance policy, then the seller/owner of the car has to intimate the insurance company about the sale of the vehicle. The seller has to mention such facts and give it in writing to the insurer. Apart from that, the seller has to pay a nominal fee to the insurer, and the value of NCB has to be paid from the date of transfer until the expiry of the car insurance policy.

Used Car Valuation Calculator:

A used car valuation calculator is a tool which is available on the internet (websites). An old car valuation calculator tool is generally used to determine the current price/market value of the vehicle. The tool will take into account factors such as how old the car is, the condition of the vehicle, accident history and the distance covered (mileage) to calculate the accurate value of the second-hand car.

As a user, you need to enter a few basic details to get the value of your old car. Once you open the tool, it will prompt you to enter details such as registration number, make/model of the car, year of manufacture and the city in which the vehicle is registered. For accurate results, you can also enter details such as mileage and the overall condition of the car. After the tool analyses all the given information, you will get the following data:

The approximate amount of money you will pay/receive while buying/selling the second-hand car.
The value you should be getting if you are exchanging the used car for a new one at a dealership.

Apart from online used car valuation calculators, you can also go through some of the used car portals to get a better understanding of the second-hand car market. You will be able to notice the seasonal fluctuations in second-hand car prices when you thoroughly go through such portals.

Factors That Affect Used Car Valuation:

As mentioned earlier, several factors affect the used car valuation. Below are the factors affecting second-hand car valuation:

Physical Condition: One of the most important factors for second-hand car valuation is the physical condition of the vehicle. One should thoroughly inspect the exterior and interior of the car and look out for any dents, rusting, chipped off paint or body damages while evaluating a used car.
Service History: Always check whether the car has been serviced at regular intervals at the authorised service centre. A regularly serviced vehicle will be in good condition and command a higher value.
Mileage: One should always check the total distance covered by the vehicle, and it is one of the most important factors while evaluating a second-hand car. It gives a rough idea about the condition of the various components of the vehicle.
Accident History: Go through the accident history of the vehicle, so you are aware of any major accidents suffered by the car. Damages to the chassis and body can significantly lower the value of a second-hand car.
Make and Model: If the second-hand car model is discontinued, you will have a hard time sourcing the spare parts. A discontinued model can be an expensive affair to own as the spare parts might be costly to procure.
Vehicle Registration Details: Check whether the vehicle is hypothecated and also check the ownership details of the used car. Also, check whether the chassis number on the Registration Certificate matches the chassis number of the vehicle.
Driveability and Features: Lastly, test drive the vehicle to check the driveability and look out for any noise under the chassis. Also, check if all the features of the vehicle such as AC, windows, lights, etc., are in working condition.

Car Insurance for Used Cars and Its Importance:

Insuring a used or second-hand car is necessary as it is an offence to drive an uninsured car on Indian roads. As per the Motors Vehicles Act, you should at least purchase a Third-Party Liability cover for your second-hand car. Failing to do so might attract hefty penalties. Moreover, a Comprehensive Car Insurance Plan provides extensive coverage for the used vehicle, as it covers legal and financial liabilities arising due to damage to third-party property/life or damage to your vehicle. So, it is important to insure a second-hand car, and you can consider purchasing a Comprehensive Insurance Plan for maximum protection.

Factors Affecting Used Car Insurance Premium:

The car insurance premium for a second-hand car depends on several factors which determine the amount of premium you pay while purchasing car insurance for your second-hand car. Below are the factors affecting the car insurance premium of a used car:

Geographical Location: The geographical location where you drive and park the car is one of the important factors which determines the car insurance premium. If the location is prone to natural disasters or if it's a theft-prone area, then the risk factor is high. Hence, the used car insurance premium will be on the higher side.
No Claim Bonus: NCB or No Claim Bonus is the discount offered by the insurer for not making any claim during the tenure of the previous insurance policy. If you have made a claim, then the premium will be slightly higher when renewing the insurance policy.
Fuel Type: The fuel on which the vehicle runs also plays a role in determining the car insurance premium. For example, a CNG car commands a higher insurance premium due to the high level of risk when compared to petrol/diesel cars.
Usage of Vehicle: A car used for commercial purpose suffers a high level of wear and tear, and the car insurance premium for such vehicles is high. On the other hand, if the vehicle is for personal use, the premium is lower when compared to commercial vehicles.
Safety and Security Features: A car equipped with advanced safety features will protect the occupants in case of an accident. Also, installing anti-theft and security devices on your second-hand car will reduce the insurance premium as there is less risk of theft.
Add-on Covers: If you opt for add-ons for the Comprehensive Insurance Plan, then you will end up paying a higher premium. But the add-on covers provide extensive coverage for your used car.

Also, read: Does car insurance go down as cars get older?

How does an insurance company determine the value of cars in India?

It is often said that one of the major factors for calculating your car insurance premium is the value of the car. If a car model is expensive to purchase it is also expensive to insure. So it is recommended to look at the whole cost of buying a car including the ex-showroom price, the cost of registration, as well as the cost of insurance. In this article, we will shed light on how an insurance company determines the value of a car to calculate its insurance premium.

How do insurance companies value cars?

Below are some factors related to the car that influence the cost of its insurance policy.

1. The ex-showroom price

There is an abundance of variety in the market when it comes to buying cars. Different people prefer different cars as per their budget and liking. Some go for luxury cars like sedans or high-end SUVs while some prefer compact hatchbacks to suit their humble needs.

The current market value of a car is used as an indicator to set the Insured Declared Value (IDV) of a car while buying the policy. This is one of the basic factors for calculating the premium. Always remember that the higher the IDV, the higher will be your car insurance premium. So in the end it all comes back to the car’s ex-showroom price and the IDV you set for buying a Comprehensive Car Insurance Policy.

2. The manufacturing year

The manufacturing year indicates the age of a car. And it is important to determine something called ‘depreciation’. In simple terms, it is the decrease in a car’s value with time.

Note that depreciation does not have anything to do with the car’s actual condition. You may maintain your car through the years by regularly checking its health but its value will still depreciate each year. Since a car’s value decreases with time, its cost of insurance also reduces.

The rules related to depreciation are set by the Insurance Regulatory and Development Authority of India (IRDAI). An insurance company does not have a say in this (you can avoid depreciation on a new car with the help of a Zero Depreciation Add-on).

3. Car’s engine capacity

Different types of models of cars have different specifications and an important one is the car’s engine capacity (cc). It is nothing but how much fuel and air your car can accommodate in its engine.

A car’s engine capacity is important to calculate the cost of the Third-party Liability premium. This cost is fixed and is determined by the IRDAI. The premium of this policy will be the same across all car insurance companies. Only IRDAI has the right to change this amount.

4. Modifications to the car

Modifications are not only limited to aesthetic changes. The car’s fuel type and performance can also be changed. For example, one can choose to modify a petrol or diesel car into a CNG model by getting a CNG kit installed.

Such changes have an effect on the car insurance premium. The insurance company will take these modifications into account and ask if you wish to include these accessories in the insurance plan. If yes, your car insurance premium will increase.

5. Presence of an anti-theft device

An anti-theft device increases the security quotient on your car and makes it safer from theft. Some car insurance companies consider this when you buy an insurance policy and offer you a discount on the premium. For this to happen, you must contact your insurer and enquire about any possible discount if you have an anti-theft device on your car.

Note that insurance companies may offer a discount only if you have installed an anti-theft device certified by the Automotive Research Association of India (ARAI). Thus, it is important to check if the device that you have shortlisted is ARAI-certified.

How to change the value of your car while buying car insurance?

You can change the value of your car while buying a car insurance policy by setting the IDV. Your car insurance company will suggest a range for setting the value of the car. You can adjust this amount and select the value that is the closest to the current market value of the car.

It is a common myth that a car insurance company sets the value of your car while you buy the policy and that this value cannot be changed. This is not true, you have the option to choose the right value for your car when you buy the car insurance policy.

How is replacement cost different from the actual cash value of a car?

The major difference between the replacement cost and the actual cash value of a car is that while calculating replacement cost, depreciation is not taken into account. While the actual value is calculated by considering the depreciation of car parts.

Takeaway:

Knowing the accurate value of a used car is very important for both the seller and the buyer. Make sure you evaluate a second-hand car accurately so that you do not end up suffering losses when selling/buying a used vehicle. Do keep in mind that the value of a second-hand car directly impacts the cost of insurance, and you should not quote an incorrect value of the car while buying a motor insurance policy.

Frequently Asked Questions:

This article has provided you with all the information related to second-hand car valuation and its impact on insurance. If you still have any queries, you can refer to the below most commonly asked questions related to the evaluation of used car:

How can I enhance the valuation price of my used car?

To get a good valuation price for your used car, you have to keep the vehicle in top-notch condition. Keep the exterior and interior clean, service the vehicle regularly and maintain the paint of the car. Also, change the tyres at regular intervals and replace the wear and tear parts at intervals prescribed by the manufacturer.

What is the value of my new car? Is it equal to 100% of its invoice price?

No. When it comes to insurance, the value of a new car is not equal to 100% of its invoice price. A car up to 6 months old has a value of 95% of its ex-showroom price. The value keeps decreasing as the car gets older.

What will be the worth of my car if I approach a dealer?

The worth of your car depends on the dealership you approach. Ideally, you should be approaching a dealer which retails the same type of car as yours. By approaching such dealerships, the chances of getting better value for your car are high. You can also negotiate with the dealer to get a fair value for your car.

How does the Car Valuation Calculator help used car sellers and buyers?

A Car Valuation Calculator helps the second-hand car sellers and buyers in determining the accurate value of the vehicle. By entering key details of the used car in the Car Valuation Calculator, one can determine the accurate value of a second-hand vehicle.

How does the insurer determine the value of my car?

The insurance company determines the value of your car by taking into account the age of the vehicle. The value or the IDV (Insured Declared Value) of the vehicle decreases as the vehicle gets older.

What are the important factors that determine the value of a used car?

The factors such as mileage, physical condition, accident history, service history and make/model determine the value of a second-hand car.

What will be the depreciation rate for my used car?

The rate of depreciation for a car up to 6 months old is 5% and for a car, up to 1-year-old is 15%. From then on, from year 1 to 5, the rate of depreciation is 10% per year.

Can I negotiate with the insurer on a totalled car?

If you feel that the value offered by the insurer is less on the totalled car, you can always negotiate. But you have to first evaluate the car with the help of a mechanic before negotiating with the insurance company.

Is it worth repairing a car that is declared a total loss?

When you try to repair a car that has been declared a total loss, then you will have to pay a very high repair bill. The insurance company will still cover you up to the IDV of your car but any expense beyond the IDV will be borne by you. Thus, it is not worth repairing your car if it is declared a total loss.

Does a brand new car suffer depreciation?

Yes, a brand new car suffers a depreciation of 5% of its ex-showroom price.

How to check the IDV of my car?

There are two ways in which you can check the IDV of your car. The first is checking the IDV offered by the car insurance company while buying the policy and the other is checking the market price of your car. Use any one method to set the right IDV for your car for the purpose of car insurance.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet; and is subject to changes. Please go through the applicable policy wordings for updated ACKO-centric content and before making any insurance-related decisions.

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