Hidden Cost of Owning a Car

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If you are thinking of purchasing a car, there are several costs that you take into consideration whether you realize it or not. If you are anything like me, you try to get a dependable car that will have few maintenance issues while also not being really expensive. In fact, the price of the car and the anticipated repair costs seem to be the two most common factors when purchasing a car. Granted, many people are now also considering the miles per gallon of a vehicle as well because of the high fuel costs.

Besides these obvious costs of a car, is there anything else? If you have purchased a vehicle without considering the most often overlooked cost of owning a car, you may not be making the right choice when it comes to selecting the most bang for your buck. In my mind, the expense that is often excluded from any calculations is depreciation.

Why Depreciation Should Be Considered

You may be wondering why depreciation really matters all that much. If you are buying a car and by some miracle, it does not need any repairs, the only expense that you would have is the initial price of the car, right? Unfortunately, this just isn’t the case. No matter what you do, you will most likely end up selling your car at one point. The rate at which your car loses value affects the amount for which you will be able to sell your car later. Failing to calculate depreciation is like saying that you will never sell your car – which hardly ever happens.

Let me give you an example of why this is important. Imagine that I have a choice between two cars that I want to buy. For this illustration, I am going to exclude the costs of anticipated repairs. You should also do your best to consider the expected repair costs, but to illustrate the importance of depreciation, I have left out repair costs of this example for simplicity.

How to Calculate Depreciation

One car is $10,000 while another is $8,000. If both cars offer similar features, I would bet that you would want to buy the car for $8,000. A simple calculation tells you that you are saving $2,000. However, this popular calculation means that you are failing to consider the resale value. If the car for $8,000 depreciates at a higher rate than the other car, this also means that you will not get as much money for it when you sell it (depending on how long you keep the car).

Let’s imagine that we know that the $8,000 car depreciates at a rate of 15% each year while the $10,000 car only depreciates 10% each year. Which one would be the better buy?

The easiest way to calculate which would be the better buy is to consider how much it will cost you for the length of time that you will own it. If you were to keep the the first ($10,000) car that you purchased for 1 year and turn around and sell it, you could sell it for $9,000. This means it cost you $1,000 to own the car. The second car, at a 15% depreciation rate, means that you could
sell the car for $6800, equaling $1200 for the year, a difference of $200. If you
continue to evaluate (using these hypothetical figures) the total cost of the car,
it isn’t until the 10th year that the second car costs less.

See the chart below for a detailed comparison:

Year

Car #1 Value

Difference

Car #2 Value

Difference

0

10000

0

$8,000

0

1

9000

1000

6800

1200

2

8100

1900

5780

2220

3

7290

2710

4913

3087

4

6561

3439

4176.05

3823.95

5

5904.9

4095.1

3549.643

4450.358

6

5314.41

4685.59

3017.196

4982.804

7

4782.969

5217.031

2564.617

5435.383

8

4304.672

5695.328

2179.924

5820.076

9

3874.205

6125.795

1852.936

6147.064

10

3486.784

6513.216

1574.995

6425.005

While this illustration is based on hypothetical figures, it does give you an idea
of how important of a role depreciation plays. By shifting your focus to long term (instead of just focusing on the asking price), it is possible that you could save yourself hundreds if not thousands of dollars. Saving money from the small things over the course of my life is one of the things that will allow me to retire early. So, the next time you go to purchase a new(er) car, make sure to take the time to consider the resale value.

Do you consider the resale value when you purchase a car?

This post was written by staff writer Corey, from 20’s Finances and Passive Income to Retire. He blogs about personal finance in order to educate others and fund his early retirement.

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44 comments to Hidden Cost of Owning a Car

  • I learned the lesson of deppreciation a long time ago the hard way. When I worked construction I got a brand new taurus. 3 weeks after that I was going home with my then 2 young children on Thanksgiving from my mothers house. I was going 60 miles an hour when a Van pulled out of a driveway 10 feet in front of me when he did not look for oncoming traffic, I literally cut the van in half in the impact.

    The first car payment had not even been paid and since it deppreciated as soon as I drove off the lot I owed $3,000 after insurance on a car I no longer had ( unrepairable damage as the motor was shoved flat into the dashboard)

    Not only that but now I owed on a car I no longer had, could not get to work the last 2 days of the season which cost me my unemployment for the winter

    a VERY expensive lesson learned ( like I said it was a LONG time ago! LOL)

    I now consider the resale value and depreciation of a vehicle!
    Carrie Hetu recently posted..Do You Know Your Carbon Footprint?

    • Wow! I’d say that was a pretty expensive lesson! I’m glad you’re ok after having that accident. It sounded like a bad one! So does that mean you’ll never buy a new car again? Or, you’ll just be avoiding Tauruses?

  • LOL I did let hubby get a brand new car in 2001 a cavelier. He wanted that experience once and I did cave, however we had drive tons then and in 5 years (it was at least paid off) but it just kind of blew up one day to where fragments of steel were in everything so bad they said was beyond repair or so much money to repair we should get another car.

    I like used for the most part however there would be a few exceptions that would have me get a new car……… our town has a end of the year dealership buy out thing. Every dealership takes their cars over to the fair grounds and it is a huge discounted event……if I could go to something like that and get even a further bargain by having cash…………….????? yeah I might do that! 🙂

    If I win a new car in a sweepstakes?……..LOL Yeah I would do that 🙂

    Other than that , it is used now adays and I hope to pay cash for any future car after we get the one we have now paid off , I plan to have a car fund building for 2012.

    and yeah I was very fortuante, the only injuries were that I sprained my hand but my kids were okay and so was the elderly gentlemen who was in the van.
    Carrie Hetu recently posted..Do You Know Your Carbon Footprint?

    • I might even cave at a severly discounted new car, but it would still depreciate quite heavily in the first couple of years. It’s best to buy used most of the time, especially if you purchase a car that depreciates very slowly. Thanks for commenting! I love discussion here in the comments section! 🙂

      Oh, and I was glad to hear that there were no serious injuries….other than your poor Taurus.

  • I didn’t consider the resale value when I bought my car (I was only 18). But my car is only worth around $1K or $2K less than when I bought it brand new surprisingly, so I’m very happy.
    Michelle recently posted..What do you wish you would’ve done differently in 2011?

    • Sounds like you got a good one! I’m guessing it gets good gas mileage and is in high demand with our high cost of fuel? I just bought an older truck for $3,300 and I could probably sell it for $3,500 in a couple of hours. It will hold its value for quite a while. 🙂

  • My wife and I bought our car outright. It was a pre owned Honda but has had no problems and we have one less bill to pay.
    Jai Catalano recently posted..The Yakezie Challenge

    • That’s awesome! First of all, you bought a pre-owned car which will depreciate at a slower rate than a new car; second, you paid cash for it, so you’re not losing money to interest; and third, it’s a Honda so it will depreciate slower than the other used cars out there. Great buy!

  • We bought our main car with the intention to drive it into the ground- it’s a diesel, so the engine should last us quite a while. C actually jokes that he wants to be buried in it.
    Our second car, though, we probably overpaid for to begin with, and I’ll be lucky if a dealer doesn’t charge me for it when we trade it in for a new car (not for a couple more years, though). However, our next new car will also hopefully be our last, as we will once again likely go with a diesel.
    shanendoah@the dog ate my wallet recently posted..U.S. Healthcare is Broken

    • I think I will always choose to buy a used car and plan on driving it to its death. It’s just the best financial move when it comes to car purchases! Thanks for the comment!

  • The last number of years I have bought cars from friends or family and avoided dealerships and a new car. Not only do I like knowing the cars history and where it has been but I also like not having to pay for depreciation. It works out really well.
    Miss T @ Prairie Eco-Thrifter recently posted..How to Throw a Green Party

    • Sounds like you have it figured out Miss T! It is nice to buy vehicles from friends because you know if they’ve had issues with the car or not. I almost bought my nephews car recently – it doesn’t look too pretty, but he’s owned it for 10 months and has never had a problem with it! Those are the types of cars everyone should be looking for. Thanks for the comment!

  • Derek & Corey, that’s why I always do two things with cars….

    1- Look for makes with high residual values…I’m big Honda guy because they are tops for retaining value!

    2- Keep cars forever! Yup, that may surprise you, but I try to hold onto a car until it just won’t go!
    Car Negotiation Coach recently posted..Credit Sesame Review

  • Weekly Roundup – 1-2-2012 – Smart Wealth

    […] the market for a new car? I will be in mid-2012.  Stop by Life and My Finances to find out the hidden costs of owning a car. Share/Bookmark Posted in Roundup […]

  • I’m happy to say that I’m with the majority here (I’m nothing but a lemming at heart). My goal with a car is to drive it until the engine light comes on and the car goes to auto heaven. That’s where all the good cars go, and my 72 Pinto has been a very good car.
    AverageJoeMoney recently posted..What Did 2011 Teach You About Money?

  • When I’ve bought cars in the past, I honestly didn’t think about depreciation at all. The reason is that all purchases that are not investments, like a car, computer, TV, etc, depreciate. To me, that’s simply the cost you pay to use these things.

    I think there’s value in considering resale value of a car when comparing different models. It may turn out that a more expensive model will have more value when you go to sell it later.
    Jeffrey Trull recently posted..2011 Goals: What Worked, and What Didn’t in the Year of New Ideas

    • A car is one of those “investments” that you just try to lose as little money as possible. You know it’s not going to increase in value, so not losing too much is often considered a gain.

  • I have only owned 2 cars since I turned 17 (one lasted 6 years and the other is on its 5th year of life) so no I never gave it any thought.

    That being said isn’t the depreciation of a current car just a guesstimate? If car A radically changes its body style wouldn’t the assumed depreciate rate plummet?
    Evan recently posted..Analyzing the Perception of the “1 Percent”

  • My first car was a junker, and I poured maintenance money into it like it was water. Luckily, my resale was the same as my purchase price, but the amount of money I spent at the mechanic’s made my car so much more expensive!
    Christa recently posted..New Year’s Recipes: Lemon Bars and Chocolate Souffle

    • That is the other side of the scenario you have to worry about. On one hand, you don’t want a brand new car because of the depreciation that will happen, but on the other hand, you don’t want a car that’s so cheap that you will continue pouring money into it each month. You’ve got to find that happy medium between the two. Thanks for the comment!!

  • I sure do consider resale value when buying a new car. I also look into used cars visiting carmax. In order to save money, you have to find a way to drive your current car as long as possible. Car expense is so high these days…
    UltimateSmartMoney recently posted..5 Tips on Maximizing Tax Benefit Before The Year End

    • I’ve looked at cars that went to Carmax, but in my book, this is where cars go to die and are only half-resurrected when they show up on the resale lot. If you’re good with cars and you can tell which one is a lemon, then you can go this route. If you have no idea, I would run from Carmax. Just my opinion. Have you purchased a car from Carmax? Have you had good luck with it?

  • Simple Rich Living

    In general, I am a believer that once I get a car, I will drive it until it dies. Three biggest factor I consider when buying a car: purchase price, car insurance cost and maintenance cost (reliability factor).
    Simple Rich Living recently posted..How much credit card limit do you have/need?

    • Mmmm. Good point SRL! The insurance cost is huge when it comes to vehicles! My friend just got an old Jaguar and found out that it’s going to cost him 3 times as much to insure it as his Volvo! He’d about ready to sell it already.

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  • I didn’t really focus on depreciation when I purchased my car a few years ago. However, since I have taken (well, MR. LH has taken) really good care of it, it’s still in great condition (only one small scratch on the door panel). We pulled a Kelly Bluebook price recently and it’s still worth a decent amount considering it’s over 6 years old. I intend to keep the car until it dies, but if I do ever want to sell, it’s not a total loss. 😉
    Little House recently posted..ShelterKraft Werks Container Homes

  • This is very true. This is why we decided to pay cash for a quality used vehicle. It leads to lower insurance rates and you don’t have a car payment. Win-win!

  • I have a Hyundai Elantra 2002 in excellent condition, regularly parts changed in last 6 years. The resale value won’t even be $3,000 but to buy a car in that condition would take upwards of $6,000 So am keeping my Hyundai as long as it runs.
    SB @ One Cent At A Time recently posted..A Look Back On the Year 2011

    • It’s good that you understand the costs of purchasing another car. You might be able to sell your car for $3,500, which might be more than you’ll ever get in the future, but you’ll have to buy a car for $6,000 to replace it! It’s just not worth it in the long run.

  • Weekly Roundup – 1-2-2012 – Smart Wealth

    […] Life and My Finances reminds us of the hidden costs of owning a car.  A great reminder for me as I will be in the market for a new car in 2012. […]

  • That’s why I prefer not expensive cars. I’m not going to pay extra cash only because it’s Range Rover or Mercedes CLK.
    Alexander Collins recently posted..Scalping in Forex: Small Steps to Big Money

  • Tyra~

    While I agree with you, I also have to disagree. I could never buy any used car. My first car wasn’t used, my 3 recent cars I purchased weren’t used (09′ cobalt (my daily driver) 10′ cobalt TC and a 2012 gen coupe) while i can never trade in my newer babies because of how much i modded them for racing (yay for being a professional modder) I can say that used cars are great for normal people looking to just get from point a to point b. Another thing is…RESEARCH! Thats the one helpful piece of advice I can give to people. My parents own cars well over 70k but! they did research, they bought them overseas where its at least 40% cheaper and shipping wasn’t terrible. Because of that, my parents NEVER spent more than 25k for their cars. Heck, on my fully loaded gen coupe i didn’t even spend 20k when it retails 35-40k i believe here in the states. Another thing is that if people want to save money when buying a car then do the maintenance work yourself! Its not that hard. People are always like “because your job involves working with cars its easy for you.” Almost anyone can do car maintenance AND you’ll save oodles of money. and NEVER EVER drive the car down till it breaks. What if you do that then you didn’t save up enough for a car or you cant finance one? You’d be SoL.

    • Sounds like a good case of, “Penny wise, pound foolish.” Yes, you parents may have found a great deal overseas, but they still paid $50,000 for a car. They could have bought one in great shape that was probably pretty comparable for $20,000. Sounds like they just wasted $30k to me.

  • TheDailyThinker

    Thanks Derek. I’m sure I learned that in high-school math, but haven’t had the need to apply it in a long time. I bought a new car 13 years ago and it’s still on the road….barely. The main mistake I made was buying a new car. I probably should have bought a slightly used car. Anyway, I haven’t had a car payment in 8 years. My wife’s parents gave us a car from 2004 when they got a new car a few years ago. We’ve been fortunate that way.
    TheDailyThinker recently posted..Government, Taxes and Services

  • Mark @ Auto Insurance quote

    There’s no better feeling than pulling into your driveway … cutting your lawn … cooking in your kitchen … swimming in your pool. After all, owning a home is the “American dream”.
    Mark

  • Here are two good tips to not only help you save money on auto insurance but to make sure you get the best insurance for the money that you do pay!
    The first tip is to check out the JD Powers Auto Insurance Companies ratings. JD Powers is an independent organization and they rate the US insurance companies by factors such as Overall customer satisfaction, pricing, billing and payment etc. So check out there rankings to help you decide what companies you should trust for your auto insurance.
    The second hint is to check out some of the US States Insurance Department web sites. I know that the state of Texas website and the state of Massachusetts websites have tools to give you estimates of what your auto insurance will cost from 20 or more different insurance companies. I was surprised that some of the more expensive companies charged well over $1000 a year more for car insurance then some of the less expensive companies for the same insurance. Check them out it can help save you a lot of cash.

    Hope this helps some people out!

    Mark

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