When you are looking to buy a car, advertisements and salesmen will often discuss the total price broken down into the monthly cost. This creates the illusion of discussing what you are willing to pay instead of the consideration of which vehicle is the best value. This article will change the way you think about the sticker price of cars and give you the insight to make the right choice on a car you can afford.
Buying for value and affordability are the most common reasons to buy a used vehicle. We discuss how to maximize both theses elements when considering a new used car.
The Real Cost Of A Used Car
Most people shop for used cars based on the price tag. But to maximize value and budget, only considering the price is not enough. The real cost of a car is the money expensed between gaining ownership and releasing ownership. Therefore the real cost is the depreciation during ownership and the cost of capital (interest) for that duration.
Lets consider a 2009 Acura TSX for an ownership of 3 years in our example. All values that contribute to increasing the cost of ownership is indicated with a positive sign. The average price of a 2009 TSX with 90,000 km is $19,000.
In summary, owning the TSX will cost approximately $8000 over 3 years. The price per month quoted for $19,000 is $527 per month, but the real cost of ownership is $222 per month. See the below for the assumptions.
Cost to Obtain (+$19,000)(+$1,350)
This is the lump sum amount required to gain ownership to the car. The second number is if you do not have the cash on hand, that is the cost of interest if you set up an auto loan at 4.5% for $19,000 over three years.
Projected Resale and Depreciation (- $12,500)
Expected value of the vehicle in three years, $6500 in depreciation. Depreciation represents the largest cost to owning a vehicle. Projecting depreciation is always tricky, because it is a combination of many subjective factors including market perception. However, it is a projection that must be made to make an accurate assessment of cost of ownership.
Opportunity Cost of Money (+$1,500)
This is the opportunity cost of the $19,000 Josh spent on his car. If he invested the money extremely conservatively (3%), he would likely have $1500 in three years. The greater the cost of the car, the higher the opportunity cost (money gained if it the price of the car was instead invested).
- Vehicle is owned for only three years.
- * Resale value is $12,500.
Buy Smart by Buying Value
When you are budgeting for a new car, look at the sticker price and subtract the expected re-sale in 3 years. Depreciation will have an extreme impact on your finances if you are only comparing the monthly cost to own the car. There is a big contrast in expected value for two cars that cost the same, but have a big depreciation difference.
A conservative and safe depreciation cost is $2500 a year. Look at how much you can sell your car for; how much are you paying in depreciation so far?