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How much does your car really cost?

American Government Special Collections Reference Desk

How much does your car really cost?

Kari Hoopes
May 8, 2007

Owning a car is very expensive. The real expense involves much more than your purchase price, or monthly car payment. That makes up only about half of the average monthly car expense. The true cost of your car includes: First, your loan payment. A 5 year loan on a $20,000 car is approximately 400/month, dependent on your interest rate. Second, insurance (collision because of the loan) is typically between $75 to 200 per month (depending on where you live). Third, Gasoline at $3.00 per gallon and an average annual use of 15,000 miles per year, costs about $150 per month. Summer 2007 it would be more like $200 per month as gas is scheduled to be closer to $4.00 per gallon.

Finally simple repairs (assuming $300 per year, which is conservative, even for a car under warranty), routine maintenance, and annual registration, all add up to another $60 per month. In all, neglecting the extra things you do to or for your car, the AVERAGE car costs between $685 and $860 a month. I won't even start on owning a truck! In five years, you will have spent between $41,000 and $52,000 dollars for your car which is now worth closer to $4000 dollars. Do you feel you are getting the most for your money? Typically you do not have a choice in whether or not to drive, but you do have a choice in what you drive and how you drive.

So when shopping for your next car, consider the true cost of your car and what factors influence that cost. It is a luxury to be able to shop for the car you want. A luxury most cannot afford, instead, decide what it is you need. Will you need four wheel drive? How many passengers will you be routinely carrying (how big is your family)? Also consider how long you want to keep the car as the number of passengers may change before you are ready for another car.

Finally determine before shopping what you are willing to spend on a monthly basis for this car. Let this number determine the kind of car you buy and the price you are willing to pay, and if at all possible, buy used. There is nothing wrong with buying a new car, but if you are trying to reduce expenses, buy used. The intrinsic value of car is mostly independent of its age. As long as it can get you from one place to another it has value and the extent of that value depends on how long that car will continue to serve that purpose minus the maintenance expense to keep it serving. Any price above intrinsic value can be attributed to marketing and personal preference; values considered extrinsic. A new car comes with intrinsic value which will decay proportionately with use and abuse, though the vast majority a new car's price is extrinsic and will decay independent of use at an exponential, meaning that they lose a percentage of their value each year. So each year, the decline in value decreases. For example, if you buy a $20,000 car that depreciates 20% each year, after your first year the car is worth, $16,000, after the second year it is worth $12,800, then $10,240 its third year, and after 5 years, worth $6553. These numbers are just an illustration. The true depreciation of a car is quite a bit higher (about 28% each year). Typically after the third year, the price of a car starts to stabilize. If you want as new as possible and still get a decent deal, wait until the car is about 3 years old. If you want as little depreciation as possible, wait until car is at least 6 years old. At this point, the car is old enough that much of the extrinsic value of the car has decayed away, but is still typically free from major physical wear.

You can gauge how much intrinsic value a car has by how much differences in mileage influence price. For example, if you had two cars of the same make, model, and year; If the first had 120,000 miles and sold for $10,000 while the other had 60,000 miles sold for $13,000; then, based on the selling prices, the intrinsic value of 60,000 miles is $3000. If the market perceives the average life of this car as 180,000 miles, then the first car's intrinsic value is $3000, the second car's intrinsic value is $6000, and a brand new car had an intrinsic value of about $9000 and an extrinsic value of $21,000 if bought new for $30,000.

Once you have a good gauge of intrinsic value, the next step is to determine what mileage range to buy. This depends on how long you intend to intend to keep the car for and your budget for maintenance. A car with lower miles may not necessarily be better if higher miles fits works within your time frame just as well. For example, if a car model is not expected to last beyond 200,000 miles, and you want to own this car for over 5 years, then you should probably not buy a car with more than 125,000 miles. If you only intend to have the car for 2 years, you can get by with a higher mileage car and pay significantly less initially. The same rule also applies to warrantees. If the car's warranty expires at 100,000 miles and you want to keep it at least 3 years, then you will probably want to buy a car with at most 65,000 miles.

This is a simplistic description of auto pricing as many other factors also influence price. In general, when looking for the right car, remember these three things: first, know exactly what you need; second, know how long you plan to keep it, and third, use not age determines value.

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Kari Hoopes: Editor of http://automotive.yourbetterbuy.com, writing articles to help people make better consumer and financial decisions.



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