You can purchase a car by following ways:
New car purchase
Leased car
Used car
New Car
Generally the American public has chosen the new car purchase as the most preferred means of buying a car. However in the past several years the cost of new cars has increased faster than the purchasing power of the general public. Earlier cars were generally paid off within 2-3 years however now longer term loans are available for five to six years. You should also check the depreciation rate of the model as you might end up with next to nothing for some models when you go for a trade-in in a few years. Below is the ownership cost of the new car.
The ownership cost is for a new car with an average 12,000 miles driven by the owner. The car cost is $20,000.
First year ownership cost( for a 3 year loan@6%)
| Down Payment of the car | $3,000 |
| Monthly Payment($606/month) | $7,272 |
| Insurance | $1,130 |
| Maintenance | $100 |
| DMV | $300 |
| Total | $11,802 |
Cost of ownership for five years total
| Down Payment of the car | $3,000 |
| Monthly payment($606*36months) | $21816 |
| Insurance | $5700 |
| Maintenance and other repairs | $1,100 |
| DMV fees | $1000 |
| Total | $32,616 |
As you can see insurance takes up a huge chunk of the overall cost. You can try several ways to keep your insurance bill low. Besides this if you increase the overall period for the payment from 3 years to 5-6 years the net payout for interest will also increase substantially although with a lower monthly bill.
New car lease
Many people wish to go for vehicle leasing as the cost of buying a car has increased. The main advantages of it are:
1. Zero or low down payment
2. Lower monthly payments
3. Lower sales tax
For a similar car of $20,000 with an average drive of 12,000 miles an year you can compare the cost of lease vehicles.
First year ownership cost(for a lease of 3 year@6%)
| Down payment of the car | $1,000 |
| Monthly payment of the car($350/month) | $4,200 |
| insurance payment | $1400 |
| Maintenance | $100 |
| DMV fees of the car | $300 |
| Total | $6700 |
As you can see this is substantially lower than the cost of ownership for a new car purchase.
New car lease- 5 years total cost(two 3 years lease@6%)
| Down payment | $2000 |
| Monthly payment for the car($350*36 months,$385 *36 months) | $21,840 |
| Insurance payment | $6,800 |
| Maintenance | $800 |
| DMV fees | $1,230 |
| Total | $32,040 |
Used car purchase
After the very high cost of ownership for both new car and lease car you can see substantial saving with a used car. A comparison is made with a similar model car which is bought at $8,000 and is in good driving condition with average mileage. The payment is made with $2,000 down payment and rest payed with loan. You can also find good number of used cars less than $5,000 which will still give you many more miles. However it is good to keep certain things in mind while negotiating a deal for a used car.
Used car ownership cost for first year(3 year loan@8%)
| Down payment for the car | $2,000 |
| Monthly payment ($190 per month) | $2,280 |
| Insurance | $850 |
| Maintenance | $300 |
| DMV fees | $200 |
| Total | $5,630 |
Used car ownership for 5 years ( 3 years loan@8%)
| Down payment for the car | $2000 |
| Monthly payment ($190 per month) | $6840 |
| Insurance | $3110 |
| Maintenance | $2700 |
| DMV fees | $600 |
| Total | $15250 |
As you can see the monthly payment is reduced to a great extent. The insurance required is also low especially if you do not go for comprehensive and collision coverage. Although you might have to spend a bit more in maintenance because of the higher mileage of the car. Still overall it can be a big benefit. Obviously you should check the car properly before purchasing so you do not land with someone else's lemon. You should follow some basic test drive rules to make sure the car is in perfect condition as this is the time when you can know of all the problems. As a final point it is always good to check the history of the car before going into the paperwork for used cars.
This is the overall cash out of pocket you might see:
| New Car Ownership Total | Used Car Ownership Total | Lease Car Ownership Total | |
|---|---|---|---|
| Total cash spent | $32616 | $15250 | $32040 |
| Value of the car after 5 years | $7000 | $2000 | $0 |
| Adjusted cash spent | $25616 | $13250 | $32040 |
| Adjusted cash spent every year | $5,123 | $2,650 | $6,408 |
Hence you can see that used cars do offer a substantial benefit however you might have to spend more time in its maintenance. Again you should research nicely with a used car as you might be able to get a good car with a great deal and the best thing with them is that once the car is paid off you can drive them till the wheels fall off.
However as usual the overall decision should be based on your financial position and lifestyle.
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