We are an automotive transportation society. With approximately 255 million vehicles on the road, the U.S. ranks at the top of large developed countries for per-capita vehicle ownership. For many, cars are both a blessing and a curse. They’re an incredibly convenient mode of transportation, but owning one is also a large, never-ending expense. And as with all things financial, the expense’s impact on your budget depends on the decisions you make.
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The Cost of Owning a Car
The American love affair with the automobile is over-driven by emotion. Large SUVs and pickup trucks are not best-selling vehicles out of necessity or practicality. Sure, a large SUV can be practical for a family of eight, much as a pickup can be practical for a contractor.
But big families and contractors alone don’t drive large vehicles to the top of the sales charts. Practical considerations seem absent in many owners’ buying calculations.
Impractical cars need not deal a financial deathblow, though — the vehicle itself is only part of the financial equation. Some vehicles are far more expensive than others for insurance.
Fuel economy is also a big factor, and it doesn’t favor big cars. Age and condition of a vehicle are a major factor for maintenance expenses, as well. Together, the costs of owning a car can have a significant budgetary impact.
What Car Should I Buy?
Your transportation needs drive the decision of which vehicle makes the most financial sense to buy. What you want is another issue. And truly, that’s fine. In most cases, it’s okay to get a vehicle that, financially speaking, is sub-optimal.
If your mission is a short solo commute to work, and an occasional trip of a few hundred miles with one or two passengers, your mission dictates something like a good-on-gas sedan. However, you won’t be tremendously hurt by having a less fuel-efficient vehicle, as you aren’t doing a lot of miles.
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If you have a lengthy commute or otherwise do a significant amount of driving without many passengers, your mission also dictates something along the lines of a fuel-efficient sedan. But in this case, buying a gas-guzzler can hurt you.
If you do a good deal of driving, efficiency becomes very important.
When you only drive a few thousand miles a year, efficiency does still impact your total cost of driving, but not by much. Your mission determines what’s appropriate, as well as how much the cost deviates from that. It’s fine to deviate from what's appropriate, as long as you do so within reason.
This means that an average-income earner generally shouldn’t buy a gas-guzzler unless there’s an overriding reason for its utility. An overriding reason as in a need, not a want.
Leasing vs. Buying
You can find many financial articles telling you to never, ever lease a vehicle. It's never the cheapest option for your transportation needs. But those who eschew leasing aren’t recommending you replace a car with a pogo stick, either.
Leasing is not the most cost-effective way to “own” a car. But it is often the cheapest way to have a new vehicle every couple of years. As long as you drive relatively few miles, have decent credit, and don’t need to customize or otherwise modify your vehicle, leasing is an attractive alternative to serial short-term ownership.
There are other situations in which it also may be appropriate, but they are rare. Generally speaking, leasing is expensive. It only makes some form of sense for those who place high value on having a new car every couple of years.
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Buying New vs. Buying Used
Here the conventional wisdom is to never buy new. Never? Seems kinda sad, doesn’t it?
The bean counters are correct that there is an optimal financial utility of purchasing a vehicle that has experienced significant depreciation without significant usage. Financially, used cars win. But that doesn’t mean you have to go that route. More on that in a minute.
There is a subset of conventional wisdom that says to never take out a car loan — only buy that for which you can pay cash. This is not always good advice.
Low-cost vehicles are often low-cost for a reason — they are less desirable. They may be less desirable for a variety of reasons.
Some factors are superficial: Maybe they aren’t the latest and greatest. Others are important. Lower prices correlate with higher maintenance costs and lower efficiency. Cheaper cars are often nearer the end of their useful lives. If you’re a good mechanic, you may save money with the cash-only purchase option — may. For many people, cash-only is not the most financially efficient method.
Financial efficiency needs to be viewed across a period of time. If you drive very little and can walk to work if the vehicle doesn’t feel like starting today, then buying that clunker for a few hundred cash may allow you to get by.
But you may incur significant maintenance costs and purchase several vehicles across the timeframe in which someone else purchases one gently used vehicle. Clunkers ain’t all roses.
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Financing a Car
If you need to depend on your vehicle and can’t buy a reliable one with cash, then financing is a viable option. The big factors in financing are the car itself and your credit.
Late-model vehicles are often eligible for lower-interest-rate loans than older vehicles, as there is less risk to the lender. It’s easier for them to sell a late-model car than it is to sell one that’s a few years older. But only getting what you need is the bigger factor. Buying an expensive SUV will cost a lot more in interest than buying a reasonably priced sedan will. Buying more than you need costs you money.
Your credit is also a major factor in the cost of car financing. For those with good credit, the interest rate on a vehicle purchase can be a relatively minor cost in today’s low interest-rate environment. But if you have poor credit, you should be very careful to not overbuy. If you spend more than you need, the higher cost of your interest will compound the additional expense.
Driving It Home
The point of buying a car is not to spend the least amount possible on transportation. That would, at best, be uncomfortable. You don’t work hard so you can be uncomfortable.
Vehicles are a big part of many people’s budgets. What you drive and how you pay for it determine the effect your car has on your budget. Translating that into something that matters determines what else you can afford to do.
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For example, that big SUV may be affordable in your budget. But you may not be able to afford both that big SUV and a nice annual vacation. That’s often the type of thing the decision comes down to: If I get the vehicle I want instead of the one I need, what else do I need to sacrifice?
That’s the rub. It often isn’t that the car you want isn’t affordable — it’s that everything you want isn’t affordable when combined, so you must select which financial choices are your priorities. There is a financial cost to following your emotions in selecting a vehicle. Buying new is fine, if that is what you want and can afford. And it’s fine to choose an SUV over a big vacation. But it’s not so fine to choose the SUV over retirement funding.