Car Buying: Invest Or Expense?

Whether or not to invest in a car is a complex question. While a car can be essential to an individual's quality of life, it is not usually a good investment in the traditional financial sense. Cars are depreciating assets, with some sources stating that a car can lose up to 20% of its value in the first year of ownership and then a further 15% each year for the next four to five years. This means that, when it comes time to sell, you will not get a good return on your investment.

However, some cars can be considered investments if they are used to generate an income that will pay for themselves and yield a return. For example, cars used for ride-sharing services or rental cars can be considered investments as they are income-generating assets. Additionally, some classic, antique, and vintage cars can be good investments as their value is based more on supply and demand, geography, automotive performance, and notoriety than the rate of depreciation. These cars are sought after by collectors and can increase in value over time.

Therefore, the answer to the question do you invest to buy a car? depends on the type of car and how it will be used.

The pros and cons of investing in a car

Pros

• A car can be essential for getting to work and travelling for recreation, improving your quality of life.
• If you live in a rural area with no public or private transport, a car may be necessary for your daily life and work.
• If you spend a large portion of your day in your vehicle, travelling for work purposes, a car purchase may make sense.
• If you need to drive for work, you can use the car as an income-generating asset and offset the vehicle's depreciation against income tax.
• If you need to buy a car, the best deal is often a pre-owned vehicle that has already suffered the depreciation of a new car.

Cons

• A car typically won't provide a good return on your investment.
• In the first year of ownership, a vehicle can lose up to 20% of its value and will continue to depreciate in value.
• The high cost of a new vehicle means it's a substantial expense.
• The average annual cost to own a mid-priced new vehicle, including gas, maintenance, repairs, insurance and other expenses, is $10,738 per year.
• A car requires more than just the monthly payment. There are also fuel costs, parking fees, toll fees, maintenance, insurance and annual licensing fees.
• If you only need a car for an urban commute, it will be parked and of no value to you for most of the day.
• The future of urban mobility is trending away from individual car ownership and towards public transport networks and mobility-on-demand services.

The costs of buying a car

Vehicle Price

The average transaction price (ATP) for cars in August 2022 was $48,301, a new record. However, prices can vary depending on the make and model, with some brands having higher sale prices than others. It's important to compare prices between dealerships to find the best deal.

Taxes and Fees

When buying a car, you'll typically have to pay various taxes and fees, including vehicle registration fees, sales tax, and documentation fees. These fees can add a significant amount to the final cost. For example, an 8% sales tax on a $20,000 vehicle would be $1,600. Additionally, some dealerships may add advertising fees, destination fees, and other charges to increase their profit, which you may be able to negotiate.

Maintenance and Repairs

Maintaining a car can be expensive, with costs including oil changes, tune-ups, tire replacements, and repairs. Maintenance costs can vary depending on the age and condition of the vehicle, with older cars typically requiring more frequent and costly maintenance.

Fuel Costs

The cost of fuel can vary depending on the type of vehicle and your driving habits. Choosing a fuel-efficient vehicle can help reduce fuel costs. Electric vehicles, for example, are often cheaper to charge than fueling a gasoline engine.

Insurance

Auto insurance can be a significant expense, with rates varying depending on the state, the condition and value of the vehicle, and other factors. Comprehensive insurance coverage, which covers damage to your vehicle, is typically more expensive than liability-only coverage.

Parking Fees

Parking fees are often overlooked, but they can add up, especially for those living or working in cities. Consider the availability and cost of parking in your area when budgeting for a car.

Interest Rates and Financing

If you're taking out a loan to purchase the vehicle, the interest rate will impact your overall costs. Interest rates for car loans can range from 3% to 15%, and having a good credit score can help you secure a lower rate.

It's important to consider all these costs when deciding to buy a car. While a car can provide significant benefits to your quality of life, it's essential to understand the financial commitment involved.

The costs of owning a car

Owning a car comes with a variety of costs, some of which are obvious and others less so. The average monthly cost of owning a car has surpassed $1,000, and this figure can vary depending on factors such as the type of car, driving habits, and location. Here is a breakdown of the costs associated with car ownership:

Fuel Costs

Fuel costs can vary depending on the type of car, gas prices, and driving habits. According to AAA, the average driver paid around 15.93 cents per mile for regular unleaded gas in early 2023. For a 15,000-mile year, that equates to $2,390 in gas annually. Electric vehicle charging costs are based on a rate of 15.8 cents per kilowatt-hour. To save money on fuel, consider the fuel efficiency of the car, the cost of gas in your area, and ways to optimise your fuel purchases.

Maintenance and Repairs

Maintenance and repairs are essential to keep your car in good condition. The average cost of repairs, maintenance, and tires is $123 per month for a new car. Common maintenance tasks include oil changes and tire rotations, typically done at 5,000-mile intervals. While some repairs may be covered under warranty, it is essential to budget for unexpected repairs and regular maintenance.

Registration, Fees, and Taxes

These costs vary by state and vehicle type. According to AAA, the average car owner paid $762 in 2023 for licensing, registration, and taxes. Contact your state's department of motor vehicles to determine the specific fees for your vehicle.

Insurance

Auto insurance is mandatory in almost every state. The average annual premium for full-coverage insurance is $1,765, but this can vary based on factors such as the selected coverage, the type of car, age, driving record, and location. Shop around and compare rates from different insurers to find the best deal.

Depreciation

Depreciation refers to the loss in value of a car over time. Cars typically lose value as soon as they are driven off the dealership lot. In the first year of ownership, a vehicle can lose up to 20% of its value, and this depreciation can continue over the car's lifespan. When calculating the total cost of car ownership, consider the impact of depreciation on your vehicle's resale value.

Loan Interest

If you are financing your car purchase with a loan, you will need to factor in the interest payments. The interest rate and loan term will impact your monthly payments. According to Experian, the average monthly loan payment for a new car was $735 in the first quarter of 2024.

When considering the costs of owning a car, it is essential to factor in all the expenses mentioned above. By understanding these costs, you can make informed decisions about car ownership and find ways to save money. Keep in mind that the costs may vary depending on your specific circumstances, and it is always a good idea to review your budget and shop around for the best deals.

The potential return on investment

While buying a car is essential for many people, it is generally not considered a good investment. This is because cars depreciate in value over time, meaning you won't receive a good return on your investment. In fact, a car can lose up to 20% of its value in the first year of ownership and, according to auto insurance company Progressive, can lose another 15% each year through the first four to five years of ownership.

However, there are some ways to make money from buying cars. Firstly, rare and luxury cars can hold their value and even increase in value over time as they become collector's items. For example, classic Jaguars and Aston Martins can sell for as much as $20-30 million. Therefore, if you can buy one of these cars for less, you may be able to sell it on to a collector for a profit.

Another way to make money from investing in cars is to buy cars that need a lot of work, restore them, and then sell them on for a profit. This can be a good way to make a significant return, especially if you are knowledgeable about car engines and parts and are able to do the work yourself.

Additionally, there is a huge market for custom-designed and tuned cars. If you have a talent for mechanics, you can buy basic models of cars with the potential for big profits, work on them, and then sell them for a higher price. Japanese cars are great for custom tune-ups as they are cheap and reliable but can look fantastic after some high-end bodywork.

It is also worth noting that, while cars are not considered an investment in the traditional sense, they can still provide value by improving your quality of life and employability.

Alternative investment options

While a car is often a necessity, it is typically not a good investment. This is because cars depreciate in value very quickly, losing up to 20% of their value in the first year of ownership and are therefore considered a liability.

Stocks

When you buy a stock, you're buying a share of ownership in a specific company. Stocks are a popular investment choice because they typically offer a higher return on investment (ROI) over time compared to other options. For example, the S&P 500 index, which tracks 500 large company stocks, has averaged yearly gains of about 10% since the early 1920s.

Bonds

Companies and governments issue bonds when they need to raise capital. When you buy a bond, you're giving the issuer a loan, and they will repay you with interest at the end of the term. Bonds are considered safer than stocks but offer a lower return. US Treasury bonds, or T-bonds, are considered the safest type of bond as they are backed by the full faith and credit of the US government.

Mutual Funds

Mutual funds allow you to purchase a large number of investments in one transaction. Funds can include a diverse mix of stocks, bonds, and other securities, or they might concentrate on a specific type of asset. Mutual funds are a good option if you don't want to research and choose individual stocks.

Retirement Accounts

Retirement accounts like 401(k)s and Individual Retirement Accounts (IRAs) are savings accounts that allow you to set aside money for retirement with tax benefits. For example, with a traditional IRA, you can deduct contributions now and pay taxes when you withdraw in retirement, while a Roth IRA requires you to pay taxes on contributions now but allows tax-free withdrawals later.

Real Estate

Real estate investing offers the opportunity to earn passive income from rent payments while building equity in your property. It also typically comes with tax advantages, such as the ability to deduct costs for maintenance, repairs, mortgage insurance, and property taxes. Other ways to invest in real estate include house flipping, real estate investment trusts (REITs), and crowdfunding.

Frequently asked questions