This post is a quick discussion surrounding car ownership and the associated costs. The Loan Calculator workbook can be found on the Downloads page - it is similar to the calculators that can be found on the Savings Calculators tab of The Complete Financial Workbook, but with a little more flexibility.
First off, as important as cars are to individuals, they are not an investment, as they depreciate in value over time. While there are rare cars that do appreciate in value, these cars are few and far between and typically depend on being classics, historic/iconic race cars, or cars used in movies. 99.99% of cars bought and sold are not collectors cars that will generate revenue or value - which is perfectly fine, as vehicles provide value to the user in many other ways that aren't monetary.
The Data
The Bureau of Labor Statistics provides data on vehicles, which was used for this post. The data below show that the cost of purchasing a vehicle has not increased tremendously, only 5-10% over the last 10 years, but the cost of owning. a vehicle has.
The above charts are indexed to 100 starting in November 2006. As we can see, the cost of purchasing a new or used car or truck did not increase drastically, only about 5-10% from 2006 to 20015. However, the 2015 cost of parts and equipment increased by 21% over the 2006 costs, while maintenance and repair increased 25%, and insurance increased 46% over 2006. The 2006 total cost of ownership was indexed to 300, by 2015 these costs reached an index of 392, an overall increase of 31%.
The Loan
When purchasing a car, like a home, it is recommended to put at least 20% down and finance the remainder. As with any loan, it is key to minimize the loan amount in order to keep payments low and reduce the amount of interest paid.
The loan calculators below (the one on the right is blank - what it will look like upon download) allow the user to input the purchase price/value, intended down payment, loan term, and interest rate in order to calculate a monthly payment. Further, additional items can be added, such as insurance or maintenance costs. The Loan Calculator is not just for vehicles, but any loan, so any anticipated costs associated with the loan or item should be included in the Additional Fees / Expenses line item.
The above is based on purchasing a base model 2015 Toyota Camry for $23,000. Over the course of the 5-year loan, about $1,198 would be spent just on the interest. Further, monthly costs include insurance estimated at $55/month and repairs and maintenance. Repairs usually cost about $500 annually, equating to $42/month. Over the course of the 5-year loan, the owner would have paid about $30,000 for the vehicle ($4,600 down payment and $25,397 in total monthly payments - insurance, repairs, and car loan). Despite paying almost $30,000 for the vehicle and associated, this Camry is only worth about $13,000 in 2020, about 50% of its original price. It's important to note that the math above ignores the escalating maintenance prices shown in the previous chart, as such, budgeting for increased auto expenses is key to managing your personal finances and not putting yourself in a position to be burdened by your vehicle's repair needs.
It is also important to note that the above loan structure assumes that the loan will be paid in full by loan maturity, there is not a 0% APR period or special component of the like. Tools like 0% APR are great to take advantage of, as there is no interest charge for a specified period, but these tools should not be used to buy a vehicle that would typically be out of budget.
When purchasing a car, it is important to know what your monthly payment is going towards, the Loan Calculator includes an Amortization Schedule that will automatically populate in accordance with the terms that you input. This is key, as you will see how much money you are spending on the principal and interest payments. The more you can reduce your interest payment, the better. Below is a screenshot from our example, showing only the first two years of payments.
This article and the Loan Calculator should provide you with the resources to purchase a vehicle with confidence. As usual, the more money you put down to lower or eliminate the loan balance, the lower your monthly payment will be due to a lower interest rate AND a lower loan balance.
Thanks!
Sources
Original Camry Price https://www.autoblog.com/buy/2015-Toyota-Camry-LE__4dr_Sedan/
Camry Price Now: https://www.cargurus.com/Cars/price-trends/Audi-R8-d1019
Insurance Cost: https://www.finder.com/car-insurance/toyota-camry-insurance-rates?ref=sidebar-makemodel
Camry Maintenance: https://repairpal.com/toyota/camry