Depending on where you live – urban, rural, suburban – where you work, the size of your household, and your day-to-day needs, car ownership may or may not be an essential consideration in your personal financial plan. Car purchases are one of the major financial milestones we may encounter in our lives, and they are not to be made lightly: there are many different schools of thought when it comes to the most financially responsible way to get from point A to point B. Of course, there are many alternatives to car ownership that are highly worth exploring, but for some people a vehicle is a day-to-day requirement that cannot be avoided.
The cost of car ownership uses cash that might otherwise go toward savings. New car buyers run the risk that their payments will rise as interest rates move higher and squeeze their cash flow even harder.
One of the first questions that many prospective vehicle buyers ask is whether to canvas the new or the used marketplace. Statistically speaking, used car sales dwarf used car sales. However, the supply of used vehicles is constricted by the market tendency for owners to hold on to their cars for a relatively long period, while new cars are always shipping to dealers. When deciding whether to look at a new vehicle versus a used one, it will be necessary to weigh the lifetime cost differences on a variety of levels.
Consider, for example:
- The cost of depreciation of a new vehicle
- The cost of loan payments and the associated long term interest associated with repayment of new vehicle loans (Today, data from J.D. Power & Associates shows almost two-thirds of car buyers are financing their purchases over six to eight years.)
- Fuel/energy costs and improvements to efficiency that have been made in more recent models
- The value of warranty and remaining coverage on new vehicles compared to used ones
- The availability and cost of incidental service and consumable parts replacement
Depreciation is a major factor in car ownership and purchasing, and one that many prospective car owners do not account for in their personal finance planning. Depreciation, of course, has less effect on a less costly vehicle. However, when combined with the long-term commitment to financing made for many vehicle purchases, depreciation can truly sabotage the idea of a car as an investment. As Investopedia puts it:
…buyers who put down modest down payments can end up financing a considerable portion of the car and even find themselves in an “upside-down situation,” in which the car comes to be worth less than what the buyer stills owes on it at a given time.
Keeping oneself in long-term debt (that may last even longer than the useful life of the vehicle it is financing) is a situation that most consumers ought to avoid if at all possible. Though forgoing the long-term loan process, opting for a used vehicle requires exceptionally careful calculation of many visible and hidden costs. It’s a decision that requires evaluation of all your financial priorities – your existing debt load, the timelines on your repayments, the timelines associated with your major career and/or salary goals, and the opportunity cost associated with mobility. Whether up-front or spread out over time, car-related costs can become a major part of your financial plan, and you will really need to assess how essential their benefits will be to your living and commuting needs.