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There’s a lot that goes into the true cost of owning a car. Sure, there are the tangible costs that are easy to calculate. However, the intangible costs are a lot more difficult to measure. This is especially true of car ownership.
The difference in purchase price of a brand new car verses a used car is fairly obvious. Even so, there can be additional costs hidden within the purchase price of a new verses used car. Make sure you understand what they are to avoid overpaying.
Beyond the purchase price, there are three costs to factor in when deciding whether to buy a brand new car or used car. Additional costs to consider are depreciation, car insurance and repairs/maintenance. Make sure you understand what the true cost of owning a car is.
#1 – Depreciation Cost Of Owning A Car
The common expression, “a brand new car loses half its value when it’s driven off the parking lot” refers to the depreciation on a car. That expression is exaggerated but there is certainly some truth to it.
The value of a brand new car does drop quickly once it is being used. Certain cars depreciate faster than others. The average car loses about 20% of its value in the first year. For some cars it’s much more than that though.
Toyota is ranked as one of the top car companies with the least depreciation for over 3 years in a row by Edmonds. There’s a couple reasons why this is important.
- In the unfortunate case of a car accident, where your car is totaled, your insurance company will write you a check for the value of the car. If your car has a low depreciation value, this means more money from the insurance company for a replacement vehicle. In some cases, this could be the difference of over $5,000.
- Another area where the depreciation on a car matters is when you trade a used car in for a newer car. A car with a lower depreciation value will give you a higher trade-in amount to put towards the newer car. That means less money you will need to bring with you for closing and a lower loan amount (if you have to take one out).
#2 – Cost of Car Insurance
Cars are not cheap to fully insure and the newer the car the higher the insurance costs. This is because newer cars cost more to replace than used cars. $20 extra a month in car insurance may not seem like a lot but it can add up.
The older the car is the less the need for comprehensive insurance. This could easily shave off $50 or more a month on car insurance. Comprehensive insurance will reimburse you for the value of your car in the event an accident that you’re at fault for totals your car (after the deductible is met). When the value of a car is only $5,000 and your deductible is $1,000 it may not be worth the additional $50 each month in comprehensive insurance just to get $4,000 if you total your car.
Factors That Determine The Cost of Car Insurance
There are numerous factors that go into calculating how much it will cost to insure your car. Unfortunately, you can only control some of those factors. The age of the car you are driving is one of those.
The size of your car is another factor. The larger the car the more it will likely cost to insure the car. You should ask yourself how large of a vehicle do you need verses want.
Bigger is not always better. Be honest with yourself about how much space you need on a regular basis. If on a rare occasion, there might be:
- 6 people in your car but there’s usually 4 or
- once a year you need a larger vehicle to take a road trip
Consider alternative options for those moments.
Uber or taxi services are available nearly everywhere. They can be used for a fraction of the cost of buying a car for those few times you need to fit more people in your car.
Family, friends or neighbors might even be willing to loan you their car for a short time. Alternatively, attaching a small trailer to the back of your car for that yearly road trip could be a great option. Get creative so you don’t have to buy a larger car.
Shop Around For Car Insurance
Not only will you pay less for a smaller car, your insurance will likely be less. The best way to get a good price on insurance is to shop around. It’s easier than ever to get a free quote online these days.
Expect to spend 15-30 minutes populating your information in each of the insurance companies’ databases. This can be a pain especially when it’s the same info over and over.
However, after 1-2 hours you’ll have 3-6 quotes to compare to each other. And hopefully, that time pays off with some savings. If not though, then that means you’ve been getting a good deal all along. Good job!
Some insurance companies offer substantial discounts when you pay for the 6 month premium upfront in full as opposed to monthly payments. This is a great option for those who can afford it.
Combining home and auto insurance with the same company can also have substantial savings associated with it.
#3 – Car Maintenance / Warranty
Besides the fresh car smell, perhaps the best part of a brand new car is the warranty on it. The standard warranty offered on cars is a complete warranty that covers all elements of a car for 3 years or 36,000 miles, whichever happens first.
In the event something goes wrong with your car while it’s under warranty you won’t have to worry about the cost to repair it. Note: most warranties do not cover routine maintenance such as oil changes, brake pads due to wear and tear, etc.
Warranties aren’t only offered on brand new cars. Dealerships may offer extended warranties with the purchase of a used car. The cost of a warranty will depend on the length of the warranty, age of the car and mileage on the car.
Buying a warranty can be a slippery slope. On one hand, you will likely pay more for the warranty than you would have in repairs. However, on the other hand, the cost is sunk and now you don’t have to worry about how you’ll pay for repairs if the car breaks down.
One of the cheapest cars to maintain (if not the cheapest) is a Toyota Corolla. The average yearly cost in maintenance is about $710. Maintenance costs will gradually climb as the car get older. So, while the maintenance cost on a Toyota in year 3 may only cost $500, the cost in year 7 may be closer to $1,000.
When shopping for a car, it’s important to get a sense of how much the maintenance on the car will cost over its lifespan. Not all cars are created equal. Some will cost over $1,000 a year to maintain.
True Cost of Owning A Car
Shopping for a car is not an easy task. There are a lot of factors to consider when buying a car with cost being one of the largest factors. The purchase price of the car is only one of many costs associated with owning a car.
Edmonds has a fantastic tool that shows what the real cost of owning the car of your choice will cost you for the first 5 years. This tool calculates more hidden costs than just the cost of depreciation, insurance and maintenance.
It is an invaluable tool to use on your journey to purchasing a new car and understanding the true cost of owning a car. Knowledge is power and in this case knowledge can mean more money in your pocket.