When it’s time to purchase a replacement car, truck, or SUV, the experts suggest that you evaluate something called the Total Cost of Ownership. To properly evaluate this important financial decision, they say, it’s critical that you look beyond just the car payment itself. Add to it the cost of insurance, fuel, maintenance, and depreciation to find out what the vehicle will truly cost you over how many years of ownership.
While adding up the cost of insurance is as simple as asking your agent or company, and there are plenty of places you can check the maintenance schedule for the vehicle and estimate costs, depreciation is a tough number to nail down. At best it’s an approximation based on prior history of similar models from the same manufacturer.
Once you understand that depreciation is a major factor in Total Cost of Ownership, you can save a great deal of money with every car that you purchase. Take a brand new car for example. It loses 20% of its value as soon as you drive it off the lot, so your $30,000 car is now worth $24,000 and you haven’t stopped at your first red light. By the end of the first year, depreciation coupled with mileage and wear and tear could bring that down another 10% to $21,000. That’s $9,000 lost forever in the first year.
Instead, consider the same car, but at three years old. It’s lost half its value due to depreciation which means you could purchase that car for around $15,000. As the rate of depreciation slows as the vehicle ages, you could sell that same car three years later for $10,000. So the used car depreciation cost you only $5,000 over three years of ownership.
On top of that, vehicle registration and insurance are less expensive for older cars, trucks, and SUVs
One study correlated data from a variety of sources to determine vehicle value, depreciation rate, and costs of repairs and found that even 10-year old cars cost more in depreciation than they absorbed in repair bills. In other words, it takes a long time before repair costs start to outweigh the depreciation of the vehicle.
It used to be that purchasing a pre-owned vehicle was the last resort. Now financial advisors are encouraging their clients to purchase used cars, trucks, and SUVs because of their lower overall Total Cost of Ownership.
One of the reasons is that cars have never been more dependable than they are today. It’s not uncommon for properly-maintained vehicles to deliver more than 100,000 miles or more before needing any major repairs. We can see that in the average age of the cars on the road. In 1992 it was just over nine years old. Today it’s closer to 12, demonstrating the durability of modern cars, trucks, and SUVs.
Maintenance costs are similar to, if not lower than, new car service. All cars require regular maintenance including oil changes, tire rotation, and brake pad replacement. But by driving a car that’s just a few years old you’re getting a vehicle that is designed to go much farther between these scheduled maintenance visits. Even tires and brake pads last much longer than before.
And when you are considering a new vehicle versus one that is pre-owned, your purchasing dollar goes further. For the amount that a basic economy car costs to purchase new, you can purchase a three-year-old performance or luxury model for the same amount. And given that there’s not been any major change in vehicle styling, it’ll be difficult for most people to know whether you’re driving a brand new or slightly used car.
So when you compare the Total Cost of Ownership between a new car and one that’s been pre-owned, consider the advice of financial experts and save yourself some serious cash by purchasing a used car.
