Buying a new car every few years is a lot of fun. You get the latest features, don’t have maintenance headaches (barring a lemon purchase), and have the status symbol of a newer car. But if you’re going for the most bang for your buck, trading out vehicles often is not the way to go.
Maintenance Costs Less than Depreciation
A common myth says that the amount you spend maintaining an older car will more than cover the purchase of a newer car. Except for extreme circumstances, this is not true. As an example, we’ll look at my 2006 Grand Caravan. Grand Caravan’s are notorious maintenance drains. This past year, we had another major repair every couple of months. Between tie rods, suspension, brakes, and oil changes, we spent $1435 just maintaining van for a single year. Even though this past year saw a little more maintenance than usual, it still seems like a no-brainer to trade it in for a newer vehicle right? Except that newer vehicles come with their own costs that we tend to forget about.
To make an educated comparison, we can use Edmund’s True-Cost-to-Own tool. We’ll first look at a brand new 2016 Grand Caravan. Over 5 years, the new Caravan will depreciate $10,948- over $2000 per year. Way more than the maintenance I pour into my rusty old Caravan. And with a KBB value of less than $3000, my current Caravan doesn’t have a lot more room to depreciate.
But perhaps you’re better off trading out for a gently used late year model– perhaps a 4-year-old 2012 model. This makes a little more sense than the brand new one, but I’m still better off hanging on to my old beater. Edmunds predicts the depreciation on the 2012 model to be $5,357 over the next 5 years, or $1071 per year. True, this is less than what I spent on maintaining my current vehicle. But since this 2012 vehicle isn’t brand new, it will still have maintenance and repairs of its own. Even with a low-ball maintenance estimate of $400-500 per year, the 2012 model would be costing us $1500 in depreciation and maintenance. If this were all we were considering, the 2012 model would be on par with my 2006. But maintenance and depreciation aren’t all.
Depreciation, Car Value and Monthly Payments
If you don’t pay for your new car in cash, you’ll be making monthly payments on the car for 5 years. Those monthly payments are going to be based on the car value. Depreciation is also based on, and affects, the value of the car. If you read the last section about depreciation, scratched your head, and wondered how that affects you now, perhaps thinking in terms of monthly payment works better. If so, swap out the depreciation numbers for monthly payments on the newer car. As long as you finance the bulk of the purchase, your monthly payments will be significantly higher than depreciation, making a newer car look even less attractive.
The Newer the Car, The More the Insurance
Car insurance covers the loss of value on a vehicle. The more the vehicle is worth, the more potential loss. The more potential loss, the higher your insurance premiums. Our old caravan costs about $200 per year to insure. The 2012 model would cost about $600 per year to insure. A new model would cost $700 per year.
Registration Fees and Taxes
This varies from state to state, but often the annual registration fees on a vehicle are at least partially based on the value of a vehicle. We live in Iowa, which uses a progressive tax rate on their vehicles, where newer vehicles are taxed at a higher rate than older ones. This can easily work out to a difference of a few hundred dollars per year between older and newer vehicles.
If you finance your vehicle, you can add the cost interest to the equation as well. This can easily add another few hundred dollars per year to the cost of your new or newer vehicle. Even if you pay for your upgrade in cash, there’s still the question of where else that money could have been working- perhaps paying off higher interest debt, or perhaps earning investment returns in a retirment account.
Every time you swap out vehicles, you incur transaction costs. Your state will slap on sales taxes, titling fees and/or licensing fees (this is in addition to the annual registration fees discussed above). A dealer is also going to take his cut of the sale from the trade in, new purchase or both. Even if you do everything via private sale, you invest the time and effort of listing your car on craigslist or classifieds and meeting potential buyers.
Spend What You Can Afford
I don’t want you to walk away from this post feeling that you should never buy a new car. I don’t expect to retire with my 2006 Grand Caravan. In fact, I recently traded our 2011 Accent in for a 2016 model. I was fully aware that the 2011 model would have been cheaper to own. However, the point of this post, and this blog, and life isn’t to scrape through life spending as little as possible, but rather to be aware of your spending and keep that spending within your means (also known as budgeting).
If you bring in an income that allows you to trade in your vehicle every two years, while still being able to meet your other financial goals, that’s great! But if you’re barely able to pay for maintenance on your current vehicle, don’t think that buying a new car is going to make things any easier. Even if you can afford to replace your current car, perhaps being aware of all the costs involved in buying a newer car will make you decide to keep your current car for an extra year or two. After all, if it still runs well, and still fits your needs, why not?
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.