Friday, September 10, 2010
So, I decided to sit down and crunch the numbers on how much a new car really costs over time. The results were astounding and completely unexpected. I had always thought of new cars – even cheap new cars like Hondas - as a luxury… something you had to pay much more for than a used car, the “uneconomical choice”. But it’s looking like, when done right, it can actually be very affordable.
To come up with these numbers, I started with the price of the new car. Then, I went on Autotrader.com and searched listings for one, two, three, etc –year-old cars and recorded the average prices out of thousands of national real-world used car listings (the site does this for you at the bottom of the page so it’s just a matter of typing in the year, make, model, and trim and copying the result). To find the overall “cost per year” at any given point in time, you simply subtract the corresponding value of the car from the original price and divide it by years of ownership. For example, if you buy a $20,000 car and it is worth $14,000 three years later, you divide 6000 (the difference in value) by 3 (the amount of years you’ve owned it) and find that you have spent a mere $2000 per year to own that car.
The chart above is for my Camry. The original transaction price was $21,900 (in retrospect I could have gotten a much better deal… but I digress), the other figures all come from the average Autotrader values (4-cylinder LE models only). First year depreciation is steepest, after that it levels off at a slower rate. The sharp 5-year-mark dropoff is no doubt due to that being the older generation (2006 model), from there onwards it declines rather steadily.
Granted, there are a lot of disclaimers here. For one, these result only apply if you pay in cash, since financing will not only cost more over time but also bind you to the car for a predetermined amount of years… I think 60 months is the typical term now, depressing as that is. I have yet to finance any car so I don’t really know.
Second, this can only really work if you choose a car that’s affordable in the first place (i.e. well under $25k) AND has stellar resale value, which these days pretty much limits your choices exclusively to Toyotas and Hondas. Again, fine by me, I decided quite a bit ago that those are the only the way to go for various other reasons.
Of course, maintenance and upkeep are not taken into account here either, but up until year five these costs should be minimal. My Camry actually has completely free maintenance for the first two years, courtesy of Toyota. Even if maintenance wasn’t free, assuming you have oil changes every 5,000 miles and that you drive no more than 10-12K per year, the cost will be under $100 per year. Hardly worth taking into account. By year four or five, you may have to start to factor in brakes, tires, and major services such as the 30K and 50K scheduled maintenance intervals (which will run in the hundreds), at which point it will be somewhat more expensive. Until year five any mechanical repairs will be covered under warranty, after that, they have the possibility to show up. Given that the cars in question, though, are Toyotas and Hondas, they should be able to easily make 100,000 miles (about 8 or 9 years) without any mechanical issues. Actually, some American and Korean cars are even able to that these days, but they still won’t be worth as much when it comes time to sell.
So, what conclusions can we draw from this? Well, the perfect amount of time to own a new car looks to be five years. At this point, the depreciation curve has leveled off, but additional costs in maintenance and repairs haven’t reared their ugly heads yet. By keeping it more than five years, you are risking repairs out of warranty that could add significantly to the overall cost of owning the car. Even so, plenty of people do this, and it is not unlikely that you will reach 10 years without too many out-of-pocket costs. To be safe, I’d pick five years since the “cost per year” (sans maintenance/repairs) is only a bit higher than in year 8 or 9, and there’s a lot less risk since it will be under warranty. Plus, that way, your car will never descend out of “late-model” territory, which is certainly a nice benefit.
For around $2000 per year you can buy a brand new car every five years. Sounds too good to be, true, doesn’t it? Just remember to choose a CamCord, pay in cash, don’t drive more than 12,000 miles per year, and it keep it for at least 5 years.
Posted by Max P. at 3:43 PM