Can you apply that logic by comparing a 50-60 year old couple who buy a new car every 2-3 years (to keep the mileage under 70,000 miles and maximize trade-in value) versus couple #2 who drive a car for 6-10 years to get 150,000 miles on the car and uses maintenance costs as a determinate factor instead of trade-in value.
---G.K., by e-mail from Yoakum, TX
A. Depreciation is the largest cost of car ownership, by a wide margin. So anything you can do to diminish depreciation will reduce the cost of owning a car. The couple that buys a new car every two or three years in the hope of maximizing trade in value is also maximizing depreciation. They take the first year hit, and then they take more depreciation for a few more years. So it's a losing strategy.
When they trade in their car, they take another hit because the dealer has to buy their car at a cost low enough to make a profit selling it. The dealer, quite correctly, intends to make a profit on both transactions. Many dealerships make more money buying and selling used cars than they make selling new cars. You can get estimates of the cost of owning a large variety of cars, purchased new or used, from www.edmunds.com
One rule of thumb: you can expect a car to lose about half of its value every three years. That means it's worth half its original cost in 3 years, 25 percent in 6 years, 12.5 percent in 9 years, and perhaps 6 percent in 12 years. If that seems like a lot of depreciation, you can do a reality check with Kiplinger's annual New Car Guide, a regular feature in their December issue.
The 2004 survey showed 2 year resale values ranging from 71 percent of cost (Mini Cooper) to as little as 34 percent (Oldsmobile Alero) in the $17,000 to $23,000 category. The Toyota Camry, Honda Accord, and Ford Taurus, the three largest selling sedans in America had 4-year resale values of 43, 44, and 24 percent, respectively. However you slice it, depreciation is a very big deal.
Do the math with a few cars and you'll find the old rule of thumb depressingly representative of what most people experience. So, if you buy a $25,000 car, you'll lose about $12,500 in three years. That's an average of about $4,000 a year. Hold the same car for 9 years and it will depreciate a total of $21,875 or about $2,400 a year. Unless the car has repair costs of $1,600 a year in the years four through nine, a whopping $9,600, it will cost less to own one car longer than to own and trade three cars.
Twenty years ago you had to be a pinchpenny zealot to want to own a car for a long time. Today it's quite reasonable. Repairs and breakdowns were common after as few as 60,000 miles as recently as the seventies. Today, the reliability of most cars has been improved substantially. Tires are better and last longer. Engines go much further before they need to be rebuilt.
You can get a sense of how large depreciation looms relative to other costs by checking the Office of Transportation Technology website and examining the cost of passenger car ownership at: http://www.ott.doe.gov/facts/archives/fotw171.shtml
Estimating the size of the lifetime opportunity requires a lot of assumptions that are pretty chancy. The short-term owner, for instance, will probably be making interest payments every month, forever. The long-term owner won't have a car payment for about half of the time she owns the car. No payment, no interest. No one with good credit thinks very much about interest costs on car loans right now, but historically it has been a significant cost.
So let's measure the ballpark. If you save and invest $100 a month for 40 years, earning 8 percent, it will accumulate to $349,100. Save $200 a month for the same period and earn the 10.7 percent annual return on common stocks and it will accumulate to $1,567,469. You'll save $200 a month if you buy a car after it has depreciated only $10,000.
That's a good argument for long-term ownership of a lightly used car--- and a demonstration of the high price of automotive fashion and status.
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