You’ve probably heard for years that your brand-new car loses value the minute you drive it off the dealership lot. It’s called depreciation, and it isn’t an exaggeration to say that within a few days a new vehicle isn’t worth what you paid for it. Car value is important for resale and for claims if you’re in an accident.

How Car Value is Determined

To determine the value of a car, you must look at how it compares to other similar vehicles. A new car will have more value than a used one because people are willing to pay more for it. This is true even if the used car is just a few weeks old and has few miles on it.

The condition of the car also plays a big role in determining the value. A clean car with no scratches, dents or dings is more valuable than one that has been beat up.

Different Values

Your car will have a different value if you’re selling it than if you’re trading it in at a dealership. Resale value is usually more than the trade-in value of a vehicle. Dealers must resell the vehicle so they pay less than the resale value in a trade-in.

Now, this isn’t always the case. You may have heard of the “push, pull or drag it in” offers where dealerships will take any used vehicle regardless of condition and give you a certain trade-in value on a new vehicle. Don’t think the dealership is being generous with their trade-in offers. They know they have enough room on the mark-up price of a new model to give you a decent trade-in even if you’re vehicle isn’t worth it.

Why Value Matters with Insurance

The value of your vehicle will be important if you must file a claim for an accident with your car insurance company. The adjustor will use the value to determine whether the car can be repaired or will be totaled in a major incident.

While there’s no hard and fast rule for when a car is totaled, many insurance adjustors use the 80 percent line. If the damages cost more than 80 percent of the car’s value, the adjustor will often total the vehicle.

If your car is worth $10,000 and damages are over $8,000, you can expect the vehicle to be totaled even if it’s drivable and fixable. This situation can cause you a problem if you still have a loan on your vehicle. If you owe more than the $8,000, the payment from the insurance company won’t pay off your loan, but you won’t have a vehicle.

To prevent this unfortunate situation, you can purchase gap insurance either through the dealer when you buy the car or through your insurance agency. Gap insurance pays the difference between the value of the car and the amount you owe on the loan. You may even get enough money for a down payment on the next vehicle. You should also think about paying extra on your car loan if you can afford it so that you owe less than the value before you get in an accident.