One of the greatest expenses when buying a new car is the depreciation that begins as soon as you leave the lot with your new auto. The expense of owning a car is not limited to fuel prices, registration fees, insurance costs, and maintenance. One of the major costs rarely gets figured into the equation, and that is the depreciation of the vehicle.
A report by AAA approximates car depreciation at 36% of the total cost of a vehicle. When applied to the cost of vehicles both new and used, this can make you wonder if buying is the right choice financially.
Is It Worth It?
The answer to this question depends on your financial circumstances and what the best choice is for your lifestyle and wallet, or is there a better alternative?
What Expenses Are Connected with Owning a Car?
Your initial expense will be the car itself. Whether a new car or a used car, a small, compact, or family-sized car, it should fit into your budget. You may save some money by buying a used car, but then you need to consider if maintenance costs will outweigh any savings at purchase time.
Insuring Your Vehicle
Car insurance is the next big chunk of car ownership expenses. It also is probably the most common reason that many choose not to own a car. The younger you are with less driving experience, the higher your premium will be.
The cost will depend on the kind of car, your own driving history, or lack thereof, and of course the insurance provider you select together with the amount of coverage you want. Your occupation affects car insurance as well.
There are some methods to reduce costs that you may want to consider:
- Add a parent or older driver to the insurance policy
- Have a black box installed in your vehicle so your insurance provider can monitor the quality of your driving
- Take a Defensive Driving class
- Park your car in a garage, a closed parking lot or in a driveway
- Take a higher deductible
- Bundle insurance policies
If you decide to purchase a brand-new car, consider that it will depreciate rapidly, so you may need to stipulate a policy that covers the difference between your purchase price and how much your policy might normally pay out.
In case you’re wondering if you can register your car at a different address, registration fees will vary depending on where you live. Some states may charge a standard fee applicable to all vehicles, while others may calculate registration costs on the basis of car engine horsepower, the vehicle’s age, or even the weight of your car.
Unless you pay for the entire car at purchase, you’ll probably be getting auto financing meaning you’ll have a monthly loan payment to satisfy. Loan costs will generally keep pace with inflation. Purchasing a used car may lower these costs.
Fuel Costs and Parking
Gas costs, so when calculating your budget, you need to estimate commuting costs and your weekly or monthly mileage. More driving translates into higher costs. If your business or employer doesn’t have a parking lot, you may be in for some added costs. You may need a residential parking permit or pay a monthly fee, but it will add up.
Car maintenance costs are directly related to how much you drive due to basic wear and tear. It will also depend on the kind of weather you drive in normally. Maintenance costs do increase with inflation.
Depreciation of Value
While this is not a specific expense, it will make a difference to your wallet. A car’s value will decrease from the moment of purchase. The AAA indicates that the average annual cost of depreciation is approximately $3900.
What Are the Alternatives to Owning a Car?
Again, alternatives will depend on where you live and work. Larger metropolitan areas may offer great public transportation. In rural areas, suburbs, and small towns, you may be lucky if there is a bus. Transportation needs will also vary: Is the public transportation available reliable? Does it run frequently? Is it conveniently located?
You might choose to cycle if time, distance, and weather permit. Motorcycles are also an option if you are up to the challenge. The most obvious alternatives include using taxis, Ubers, or leasing a car.
Leasing a Car
Leasing is basically renting a car for a specific period such as 36 or 48 months. Leasing will cost less upfront, have lower monthly payments, and save you the hassle of reselling further down the line. But there may be restrictions about mileage or modifications to the vehicle. Car leasing offers you the alternative of eventually purchasing the car you lease or returning it to the dealer.
What leasing does not do is build any financial equity, but you can get a new vehicle every few years.
Is Buying a Car Worth the Expense?
Purchasing an auto is never really cheap, but transportation costs are not. Your final choice will need to factor in many considerations including how far you need to travel, where you drive, and if there are viable alternatives locally. With a good driving history, insurance should cost you less.
Buying a car allows you to pay cash or get a loan and it offers a minimum of equity despite depreciation. You also won’t need to pay the fees associated with leasing and may be able to take tax deductions if you use the car for business. Long-term buying a car is less expensive if you can hold onto it for as long as possible.