How does COE affect the resale value of used cars?

PHOTO: The Straits Times file

Planning to sell your car? Understanding COE prices can help you increase your returns when you do eventually sell your vehicle.

Whether you are selling your car on your own, directly to a used car dealer, through a consignment agent or online platform , there are a lot of factors that will affect the resale of your vehicle.

From its make and model to its current condition and mileage, these factors will determine whether a dealer will pay a higher or low price. However, one common denominator that will always influence a car's resale value is the Certificate of Entitlement (COE).

Yes, the volatility of the used car market is heavily influenced by COE. How so? Well, you would need to understand the following two points first.

COE premium will affect the baseline profits of a used car sale

PHOTO: Pixabay

When you sell your vehicle to a used car dealer, they will always factor the paper value of your vehicle in their valuation.

For those unaware, the paper value of your car is determined by its COE rebate and PARF rebate .

The COE rebate can be calculated using the following formula:

COE rebate = (Quota Premium paid x unused period of COE left) / 120 months (10-years of COE)

On the other hand, the PARF (Preferential Additional Registration Fee) rebate can be calculated using the following table:

Deregistration Age

PARF Rebate

Less than five years

75 per cent of ARF

Five to six years

70 per cent of ARF

Six to seven years

65 per cent of ARF

Seven to eight years

60 per cent of ARF

Eight to nine years

55 per cent of ARF

Nine to 10 years

50 per cent of ARF

More than 10 Years

Nothing

For example, if you paid $40,000 as your ARF (Additional Registration Fee) fees, your PARF rebate would be $30,000 ($40,000 x 75 per cent) if you decide to deregister the car when it is 4 years old.

Do note that your ARF is directly tied to the Open Market Value of your car. Thus, the more you paid for your car, the higher your ARF and PARF rebate will be.

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Car depreciation - Here's all you need to know
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However, the PARF rebate only applies if your car is less than 10-years-old. If your car is over 10-years-old, you will no longer be eligible for the PARF rebate.

Another deciding factor on your car's valuation is its body value. This is determined by the demand, market changes and model of your car. Therefore, it can vary across different dealers. Do note that when demand is low, the body value of a car is lesser as well.

If you look at it from a used car's dealers point of view, their goal is to close as many sales as possible to earn a profit. In order to do so, they would want to purchase used cars with low paper value and flip it for a profit.

As such, cars with a high paper value will be less attractive to them as the profit they will earn is much smaller compared to a car with low paper value.

Understanding car depreciation

PHOTO: Pexels

Cars are a depreciating asset, meaning their value will only decrease over time. Their depreciation rate can be easily calculated base on the existing paper value.

Let's take a 2.0-litre Toyota Camry (1,998cc) as an example. We will assume that the ARF paid for the car is $40,000, and it will be sold after 2 years.

Car Model
(Year and Month of Registration)

COE (CAT B above 1600cc)

COE Depreciation Per Year

COE Rebate After 2 Years

PARF Rebate after 2 years

Paper Value After 2 Years

Toyota Camry
(March 18, 2020)

$30,012

$3,001/year
 

$24,009

$30,000

$54,009

Toyota Camry
(May 10, 2021)

$58,089

$5,809/year

$46,471

$30,000

$76,471

If the current COE prices are low and you have a car with a high paper value (like the Toyota Camry registered on 19 May 2021), dealers would be less inclined to purchase your car as the depreciation rate of your vehicle is probably higher than that of a new car (assuming COE prices are low).

Sure, it might fetch a higher deregistration value, but as mentioned above, dealers are less eager to purchase a car with high paper value as the profits are marginal, and the chances of it being purchased by an interested buyer is probably low as well.

Therefore, scrapping the car would be a more preferred choice.

Conclusion

A car with a lower COE value allows you to get back a reasonable amount of money when COE premiums for new cars are high. But, if you bought a car with a high COE, it is likely to incur losses and the chances of getting a fair valuation is low.

As a general rule of thumb, a car is a depreciating asset, and the longer you hold on to it, the more losses it makes. In conclusion, it is best to keep up with the COE prices for new and used cars. It gauges the returns you will make off its resale value.

This article was first published in Motorist.