By Ron Dorner
Cars are expensive; especially new ones! Do you know when or if it makes sense to buy a new car? It is important to calculate your true costs of buying new versus buying used. My wife and I have not bought a new vehicle in more than 27 years, but recently took the plunge.
Our last car was nine years old when purchased and served us well for five years. When it was traded, we had lost about $600 per year in depreciation and totaled about $400 per year in maintenance.
My comparison is for a ten-year period of ownership. Case 1 is buying nine-year-old cars every five years. Case 2 is our new car purchase.
Here are my assumptions (over the ten-year period):
– Yearly mileage will be 12,000 miles.
– New car insurance will cost $240 more per year than driving a used vehicle.
– Gasoline cost will average $3.50 per gallon.
– Inflation will average 3 percent
– My investments will make 5 percent per year.
– Improved mileage will save $630 per year (Toyota Prius vs. older Buicks).
Purchase method analysis revealed that a credit union loan for 60 months at 5.5 percent was better than paying cash! At the end of 60 months I would be ahead $2,776 if inflation is three percent and my money earns 5 percent.
In Case 1, I assumed I would pay cash for two cars over the ten-year period paying $6,000 each with a residual value of $1,000 when it was time to purchase again.
Vehicle maintenance for both cases was assumed to be equal and therefore not included in the calculation. Actually the maintenance costs of two older cars over a period of ten years would probably be more than that of a new car kept for ten years.
The analysis proved interesting.
Case 1 showed an original $23,000 invested at five percent would end up at the tenth year with a value of $15,900 after buying two used cars.
Case 2 showed that by leaving money invested and making loan payments for five years, at the end of ten years I would be left with a value of $10,876 (this includes an estimated $4,200 residual car value).
At this point, it appears that owning the new car would cost me $5,024 more than continuing to buy used cars. We need to factor in two other important items — improved gas mileage and car insurance. Improved gas mileage over ten years will save me $6,300, but increased insurance costs over that period will cost me $2,400.
Results indicate that the cost of ownership of a new Toyota Prius versus two older cars for ten years is $1,124 ($6,300-5,024-2,400). That’s not bad. $112 per year more to drive a shiny red advanced technology car.
Hopefully, this analysis will help you to weigh the real cost of vehicle ownership.
I must admit that one of the influences in our buying a new car was that we wanted to celebrate the 50th year since we met in high school. Hmmm, now if we keep the car 12 years until our 60th wedding anniversary…
Ron Dorner and his wife, Colleen were married on Christmas Day 1959. He is director of Biblical Money Management. BMM has been helping believers handle their finances and estate planning since 1984. Online counseling is available at www.BiblicalMoneyManagement.com.