The moment you put down a deposit for your new car, it will start to lose its value. Therefore, vehicles are considered depreciating assets. Investors estimate that you would lose at least half of your investment by the time it’s paid off.
This is the unfortunate reality of owning a vehicle, and few cars manage to beat these odds. But what does this mean for your car insurance premiums?
The impact of inflation
The South African Reserve Bank aims to hold inflation between 3 – 6%, and – for the most part – it has bounced within this bracket over the last decade. This means that the cost of goods and services have increased within this bracket every year – including the cost of car parts and car services.
If you’re involved in an accident, your insurance provider will have to cover the costs. In one year, it might cost them a certain amount, but the following year it will pay between 3 – 6% more than the previous year.
In order to afford these increases, the insurance provider needs to increase the premiums it charges its clients. This means that car insurance premiums will, for the most part, increase from year to year.
But your car depreciates?
It doesn’t matter how well you take care of your car, it will continue to depreciate. This is because it is getting older. After a certain amount of time, manufacturers will stop making the parts required to keep your car moving, and these parts will slowly become more expensive. The difference in price between a new car and a second-hand car is usually big.
So then why would you be charged higher premiums for an asset that’s depreciating?
This is because insurers need to keep up with the increasing costs of inflation, as well as the increasing cost of vehicle parts. Even though your car is decreasing in value, it will continue to cost more to repair and your insurer needs to be prepared for this.
However, certain insurance providers do not increase their premiums over time. Instead, they manage to reduce them. On the other hand, the providers who do increase their premiums, are usually open to negotiation.
Make sure you get in touch with your insurance provider annually and find out whether you’re able to reduce your premium.