Thinking of buying a car? Here are some insights that might help you chose a car
Car is probably one of the biggest purchases one makes after a house. You can either choose to buy a new car or an old one. I wanted to understand whether buying an old car is a sound decision solely from a financial standpoint. If it does make sense to buy an old car then how old a car should I buy.
Let me start by making some assumptions,
Looking at a car that is worth $20,000 excluding sales tax
A 5-year loan with 0% downpayment and 3% interest rate
Driving 10000 miles a year with gas costing $3/gallon
Car loses its milage as it progresses over the years. It seems reasonable to me that a car becomes less efficient as it gets older.
I assume that I resell the car after 5 years and after year 15 the car sells for scrap.
The car depreciation and maintenance cost curve is shown below
Below is a snapshot of my assumptions in year 1 and 2. I do this analysis for 15 years and look then calculate the real value of buying a car for 5 years.
Below is the real cost of buying a car for each year old car. Year 1 depicts a new car and year 5 would depict a 5 year old car. The total cost of the car would be its depreciation + total expenses made in those 5 years.
As expected as we buy an older car, depreciation decreases but our expenses to maintain that car increase. For the assumptions I made, it seems to me that somewhere around year 7 and year 8, the car seems to be the 'cheapest'.
In these times when you are probably not driving as much as you usually would and are planning to buy a car. It is important to see how much would you be spending per month on your car. People tend to forget that a car is more expensive than just its sticker price and insurance. In the above example, a car that you buy at year 7 can cost you $420 a month. Out of those $420, $340 are expenses other than depreciation.
Now in these, I agree you stay at home most of the time and you don't drive as much as 10,000 miles a year. Let's assume that you drive only 1000 miles/year, then you would still be spending ~$310 for the cheapest year-old car. This seemed like an eye-opener for me who goes out just for groceries and to meet friends one in two weeks. I am better off paying for Uber if my monthly uber bill is less than $310.
I found this analysis interesting and gives me a perspective on how expensive a car can get. I was planning to buy a car but am holding off my car purchase till I go out more often.
Tell me what do you think in the comments below? Have I missed something?
Takeaways
I show that buying an old car is a better financial decision. There are a lot of costs associated with owning a car that we often forget. For years when we do not drive as much, it might be even worthwhile to postpone your car purchase for a bit as long as you don't have to Uber around a lot.
The link to the spreadsheet is here.