Car loans are often the 2nd or even the 1st highest monthly bill Americans have. When you add in gas, insurance, and repairs, the average car-owner can easily spend $900 a month! And that’s not for a luxury vehicle – it’s for a car like a Honda Accord or a Toyota Camry.
I don’t particularly enjoy driving. I DO like:
- Listening to audiobooks while I drive
- Taking scenic trips along the beach
- Having time to think by myself
But I still wish we had a better public transportation system where I live, and that it wasn’t even necessary for me to have a car. Unfortunately, if you only use public transportation in South Florida, it takes 4-5 times as long to get most places. That’s not an exaggeration – I’ve actually mapped it out. I’m sure others who live in more remote areas have it worse.
I’m looking forward to either a better public transportation system (unlikely) or the flexibility that Google cars will probably offer. I don’t like having to do car maintenance, and I would love being able to work or read during my commute instead of having to focus on driving. But in the meantime, I think it’s important that my readers and I recognize how much a car costs us per month, and throughout our lifetime.
You see, most people don’t do the math and figure out quite how much purchasing their shiny new car will cost them in the long-term. In fact, most just assume they’ll always have a car payment, and budget for that accordingly. You may have parents or family members who told you that a car payment was just part of life. However, if these same people were to buy a well-researched older vehicle, and do regular maintenance, they could save a substantial amount of money. They could save the type of money that would allow them to retire at a reasonable age instead of work until they dropped dead. My feeling is that if consumers understand this, many of them will choose to drive an older vehicle.
So let’s take a look at the numbers.
Purchasing a New Vehicle
According to Kelley Blue Book, the average transaction cost of a light vehicle was up to $33,560 as of April 2015. But, I think that figure is a little skewed and includes some luxury vehicles that the average consumer can’t even consider purchasing. So, for the purposes of this analysis, we can just look at the average transaction cost for a vehicle from American Honda, which is $27,564.
Let’s say you put $3,000 down on a new car purchase, and get a loan at 1.9% interest. I know many people don’t have $3,000 to put down, and they can only get a 1.9% loan if you have good credit… But again, we’ll use these figures for the purposes of this analysis. At these rates, your monthly payment on a 4-year loan comes to $531.85 per month. With a 5-year loan, your monthly payment comes to $429.48 per month.
You probably won’t have any significant repair costs during the life of your loan if you buy a new vehicle as in the scenario above. You’ll have regular maintenance costs, such as oil changes, new tires, etc. But you would have these expenses with a new or used vehicle.
I’m going to call insurance costs a wash here, as a new vehicle may have safety features that lower insurance costs, but an older vehicle costs less to insure because the replacement costs are lower.
Purchasing a Used Vehicle
Let’s compare this to my used car purchase in 2008.
I knew I wanted to buy a used car, and I did some research into which used car was the best value. I chose the 2006 Hyunda Elantra. The 2006 Elantra had great rankings on all the used car reports, but could be purchased for just 50-60% of the new car costs.
I purchased it at the end of 2008, at a cost of $8,000. It had 57,000 miles on at the time. So I’ve had it for about 7 years, and it’s still doing well. I’ve spent around $$2,200 on repairs during this time.
Once again, this excludes normal maintenance such as oil changes, new batteries, and new tires. That type of normal maintenance would have to be done on a newer vehicle, as well as an older vehicle.
I’ve had to buy a new radiator, a new washer motor, new brakes and brake pads, new rotors, a new inside door handle, new sun visors, and a new lever to open my trunk.
My car currently has 125,000 miles on it, so I’ve driven it 68,000 miles in the past 7 years.
Used Car Drawbacks
It hasn’t been all smooth sailing. There are some minor issues with small components on my car. For example, the inside door handle broke recently and had to be replaced. In fact, many of the small components are now breaking down a bit. I live in South Florida, and my car is parked outside all day long – often in the very hot sun. So, some of the little plastic components in the car have broken.
But the engine is still good, and all the important and expensive stuff is still running well. I’m not particularly well-versed in car parts, so “important and expensive stuff” is about as technical as I can get with the terminology. However, a mechanic recently looked at the vehicle and said it was in great shape.
Also, the paint doesn’t look great on my car at this point. It started bubbling and peeling off about 5 years ago. Once again, this is an issue with the sun beating down too much on my car. Also, my research indicates the clear-coat on the 2006 Hyundai Elantras wasn’t done very well.
So the car is definitely looking its age. I could spend some money on a new paint job but I can’t seem to motivate myself to do that yet. I know that a car’s appearance is very important to some people. For those people, I don’t think getting a paint job would be a bad investment. It’s just not important to me right now.
I don’t have any need at this point to buy a new vehicle. I would only be doing it for cosmetic purposes, and slight improvements in gas mileage. And I would be spending a lot of money for those things.
Breaking Down the Numbers
I’ve spent $10,200 on my car over the past 7 years. Barring any expensive and unforeseen repairs, I plan on driving it at least another 3 years. My repair needs will probably increase, so I estimate that I’ll spend another $1,700 in repairs during those 3 years. My car will be 12 years old at that point, so its resale value will probably be around $1,500. This means that I’ll have spent $10,400 on car ownership over the course of 10 years. which works out to about $1,040 per year.
Let’s compare that to purchasing a new vehicle with a 5 year car loan, selling that vehicle after 5 years, and purchasing a new vehicle with a 5 year car loan.
Remember, we are excluding insurance, gas, and normal car maintenance from this analysis, as those expenses will need to be paid on both new and used vehicles. I’m also excluding inflation from this analysis, as it has been very low over the past 10 years, and I want to avoid making this complicated.
As we reviewed earlier, the monthly payment on a 5 year car loan for an average vehicle is $429.48 per month. This works out to $51,537 over the course of 10 years. We need to add the 2 $3,000 down-payments to this, so the total comes to $57,537. But we also need to account for the resale value of each vehicle. Obviously this can vary quite a bit, but since we were looking at Hondas earlier, let’s assume that they will depreciate less than other vehicles.
So, at the end of the first 5 years, resale value of a car purchased for $27,564 could be expected to be around 50%, or $13,782. If we subtract the resale value of 2 such vehicles from the $57,537 figure we got earlier, we are left with $29,973. This works out to $2,997 per year.
So, the costs of purchasing a new vehicle are $2,997 per year, and the costs of purchasing a used vehicle are $1,040 per year. The difference is $1,957 per year. This may not sound like much to you, and you might be thinking to yourself that it’s worth spending $1,957 per year to have a new vehicle.
But think about in terms of retirement investment. Let’s say you start investing the difference in a retirement account at age 25 and continue until you’re 65. If you invest that $1,957 per year and earn an inflation adjusted return of 8%, you’ll have $506,984 by the time you’re 65 – and that’s in 2015 dollars.
Is driving a new vehicle instead of a used vehicle throughout your life worth more than half a million dollars?