Buying a car? Know the 3 main costs of auto ownership

Weigh the variables carefully when comparing new, used autos

By Gary Foreman

The New Frugal You

Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com Ask a question. 'New Frugal You' archive

Dear New Frugal You,
I know that a new car depreciates quickly, and buying a used car can be a better deal. However, I drive my cars "until the wheels fall off." Also, I've saved about $10,000 toward a down payment, and I have no other debts and could afford payments on a car in the $20,000 range. So, in this case, which is the better option? Thank you. -- Wheelless

Dear Wheelless,
I'm imagining you in a movie. 

The scene: A car dealership.

The camera zooms in on you as you as drive onto lot. Shift to closeup of Hank Markup, an experienced salesman, who spots you and approaches. He holds out his hand and introduces himself.

"Glad you came in, Mr. Wheelless. What can I show you today? Oh, a new 2010 Honda Accord LX sedan? Good choice. This model is right in your price range. You can drive it off for around $23,000. It's a vast improvement over your 10-year-old model. I'm assuming that you like it since you drove it for 10 years!"

"You want to know what your car's worth? A 10-year-old Accord? Oh, about $2,400."

"What about a used car? Yes, we can do that if you want. Take this 3-year-old Accord LX. Sticker on that one is $15,800. It's a good value. Save you about $7,000 compared to a new one.

"Or how about this 5-year-old model at $13,000? It still has a lot of good miles left in it. So what's it going to take to get you into a set of new wheels today?"

Smiling, you pull a calculator out of your pocket and begin to punch the keys.

Cue the omniscient announcer's voice: "What is Wheelless calculating? How will he make the decision?"

Dissolve to new scene, featuring ... me. (Hey, it's my imaginary movie.)

Like anyone evaluating a car purchase, Wheelless, you should be looking at the three main costs of owning a car. They are:

• The cost of operation.
• The cost of repairs.
• The cost of ownership.

The cost of repairs includes fixing the car when it's broken. A new Accord carries a five-year/60,000 mile drive-train warranty. The 3-year-old car will have two years left. With all three cars, you're on your own after year five. So with all three cars, you'll have five years of exposure, but the warranty provides coverage for the first few years of the new car or newer used car. Thus, a slight advantage to the new or newer used cars.

The cost of ownership includes what you pay for the car and how you pay for it. That's where the biggest bucks generally go. Let's suppose that you keep your next car until it, too, is 10 years old, and it's worth about $2,400 at that time.

A new car will have depreciated about $20,600 or $2,060 per year ($23,000 minus $2,400 divided by 10).

The 3-year-old car will lose $13,400 or $1,914 per year ($15,800 minus $2,400 divided by 7).

The 5-year-old car will have lost $10,600, or $2,120 per year ($13,000 minus $2,400 divided by 5).

So in this case, there's very little difference, as long as you are willing to commit to keeping the car until the wheels fall off again.

Where you would be in danger is if you bought a new car and traded it in after three years. In that case, your Accord would have lost $11,600 or $3,866 per year! Ouch!

Why would you trade after three years? The most likely reason is that you can't afford to keep up with the payments (lost job, divorce, illness). And that's the biggest advantage of the 5-year-old model. You can just about pay cash for it. No worry about payments.

So Wheelless, you have a decision to make and a lot of variables to contend with. You can opt for the new car smell and warranty, while hoping that you don't need to trade the car early. Or you can choose to pay cash for an older ride and begin banking the money that would have gone to car payments. Which is best for you also depends on whether you can get an extraordinarily good deal on the variable elements, such as financing, warranty and, of course, price.  

Cut! Cue the next question, and good luck, Wheelless.

See related: How to buy a used car, credit score

For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week. Send your question to The New Frugal You.

Published: July 22, 2010

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