10 Mar What is the true cost of owning a car?

Here’s the deal,  financing a car will cost you more than if you pay cash. That should be clear, but where you can lose even more is depreciation. If you think it’s smart to buy new, you need to reconsider. The rate of depreciation is so high on a brand new car, that it makes the cost of owning that car unbelievably high. Cars are depreciating assets, meaning they will never regain value, so you’re just losing money at a faster rate than if you bought a used car.

The top arguments I hear for buying new are: 1. It has a warranty  2. It’s safer (which is bogus, you can find just as safe a car used).  3. They want to impress people with their new car. Ok people don’t actually say that last one, but lets be honest, that is why.

Can someone honestly tell me the difference between a 5 yr old car and a new car? 5 yrs right, wear and tear, but really it still looks new, especially if you do your research. Buy a 5 year old vehicle that is the same generation as the new vehicle, meaning they have not changed the body style (if you care what people think).  Why 5 years? During the first 5 years a car loses 50%-60% of its value. After that the rate of depreciation is much slower, so your car will be worth more when you go to sell it.  But how much does it really cost to own and operate a new vehicle vs a used vehicle? Lets take a look.

For comparison purposes I chose a car that generally holds its value , a Honda Accord.

Here is a look at some estimates for a 2011 Honda Accord from Edmunds.com

2011 Honda Accord EX-L V6 Sedan

5 Year Details

Year 1 Year 2 Year 3 Year 4 Year 5 5 Yr Total
Depreciation $2,922 $2,073 $1,825 $1,617 $1,452 $9,889
Taxes & Fees $1,568 $369 $309 $269 $230 $2,745
Financing $911 $728 $536 $333 $120 $2,628
Fuel $1,540 $1,586 $1,634 $1,683 $1,733 $8,176
Insurance $1,002 $1,037 $1,073 $1,111 $1,150 $5,373
Maintenance $70 $373 $234 $896 $1,338 $2,911
Repairs $0 $0 $87 $209 $305 $601
Tax Credit $0 $0
True Cost to Own ® $8,013 $6,166 $5,698 $6,118 $6,328 $32,323

Here is the same info for a 2006 Honda Accord, minus the financing because I would recommend saving up and paying cash for your used vehicle.

2006 Honda Accord EX V-6 4dr Sedan w/Navigation

I certainly disagree with their repairs and maintenance estimates, because I have spent nowhere near those amounts in the 8 years that I have owned used cars, and that includes much older vehicles. However, that still leaves a difference of $5339, or over $1000 a year. Hondas generally keep their value very well, with car brands that don’t there is a larger disparity. For example, using the same comparisons with a 2011 and 2006 Chevy Avalanche there is about a $10,000 difference, or $2000 a year.

What these values do not take into account is that you can typically get much better deals on used cars, as you can buy from individuals. When buying a new car there is not much room to negotiate, and most people negotiate price per month rather than price and end up paying way too much.

So what is the verdict?

Check Edmunds for the true cost to own of a vehicle you plan to purchase. If you are ok with spending $1000-$2000 a year to have a brand new vs 5 yr old car, than I guess you can do it but I just don’t see how it makes sense.  And in case you were wondering if buying a new hybrid somehow makes up for the savings in gas, not really. You are better off buying a used car. The total cost to own for 5 years a 2011 Honda Civic hybrid is $31,808, or slightly less than the 2011 Honda Accord.

The lesson of this post is to make a smart decision based on facts. These figures make all the adjustments for repair costs and other things and it is still clearly much cheaper to drive a 5 yr old car vs new. So you have to ask yourself is it worth $1000-$2000 a year to have a new car? For those of you who make under $25,000 a year, spending an extra $1000 or $2000 is really ridiculous. By the way, if your income is lower, you really should be considering a much cheaper vehicle, and in that case the true cost to own would probably be about $10,000 over 5 years.  Really, you should do what makes sense for your situation, do not buy a car because you want to impress people.  Remember, it is just a mode of transportation.