During the pandemic, the used car market saw a massive 40% increase in prices. Now that prices are more stable, many people are trying to decide how to buy their next car.
Should you buy, lease, or finance it? There isn’t one perfect choice for everyone, but you can figure out the best option with the right tools and information.
In this video, I will guide you through a free online calculator that helps you make this decision. You’ll learn about the pros and cons of each choice, and I’ll explain why buying a car might be the best option today. We’ll go through how to use the calculator and the importance of key factors like depreciation and interest rates.
Key Takeaways
- Learn how to choose the best way to purchase your next car.
- Understand the impact of depreciation on your car’s value.
- Compare the costs of buying versus leasing with easy calculations.
Picking a Car Buying Plan
Buy, Lease, or Finance?
When thinking about getting your next car, you have three main options: buying, leasing, or financing. Each choice has its own perks and drawbacks.
Buying a car means paying for it all at once or through a loan. This makes you the owner, and you can keep it as long as you want. Over time, this can save you money on monthly payments.
Leasing a car is like renting it for a few years. You pay monthly fees and often get to drive a new car with the latest features. But, at the end of the lease, you return the car and have to start the process over if you want another vehicle. There can also be fees if you drive more miles than agreed or if the car is damaged.
Financing involves taking a loan to pay for the car. You’ll make monthly payments until the loan is paid off. This spreads out the cost over time, making it easier to afford. After the loan is paid off, the car is yours to keep.
Using Online Calculators
To help decide which option fits you best, online calculators can be very helpful. One good example is the calculator on Bankrate.com.
- Gather Information: First, you need details about the car. You can get a price quote by visiting the dealership or checking the car manufacturer’s website.
- Enter Details: Put in the vehicle price, down payment, interest rate, sales tax, and other fees.
- Compare Options: The calculator lets you see the costs involved in buying, leasing, or financing. Change the numbers to see how different factors, like a higher interest rate or a bigger down payment, affect the total cost.
Using these tools, you can make a more informed choice about your next car.
Using the Car Cost Calculator
Choosing Your Car
The first step is to select the car you’ll buy or lease. The best way to do this is by visiting a dealership for a quote on both options. If that’s not possible, check the car maker’s website. Each site lets you pick the vehicle and see its pricing details.
Entering Cost Details
Next, you need to input cost variables into the calculator:
1. Loan Term and Interest Rate:
- Choose your loan term. For example, 48 months.
- Enter the interest rate you got from the dealership or website.
2. Down Payment and Fees:
- Input your down payment. If you have none, enter $0.
- Include any fees, such as $2,495.
3. Sales Tax and Investment Return Rate:
- Add the sales tax rate for your location (e.g., 5%).
- Select your estimated investment return rate, based on what you could earn elsewhere.
4. Depreciation Rate:
- Estimate your car’s annual depreciation. You can use online tools or research average rates (e.g., 15% per year).
Finding the Total Cost of Owning a Car
Estimating Depreciation
Depreciation is like an iceberg; most of its value loss happens underwater, out of sight. When a new car drives off the lot, it starts to lose value quickly. Most new cars lose about 20% of their value in the first year. After that, they drop by 15% each year for the next four years.
To get a better handle on how much your car will lose value, you have a few options:
- Use Average Rates: Start with the average percentages mentioned earlier.
- Depreciation Tools: Websites like Edmunds or Kelley Blue Book have tools that estimate how much cars of various makes, models, and years depreciate.
- Marketplace Checks: Look at listings on sites like AutoTrader and Craigslist to see what people are selling similar cars for. This gives a real-world sense of value.
How Depreciation Affects Your Yearly Costs
Depreciation can change your car’s total cost significantly over the years. For example, let’s say your car depreciates at a rate of 15% each year. If the car’s initial value is $30,000, here’s how much it could lose each year:
| Year | Depreciation Rate | Value Lost | Car’s New Value |
|---|---|---|---|
| 1 | 20% | $6,000 | $24,000 |
| 2 | 15% | $3,600 | $20,400 |
| 3 | 15% | $3,060 | $17,340 |
| 4 | 15% | $2,601 | $14,739 |
This table shows how quickly the value can drop. The bigger the depreciation rate, the more you lose each year. Understanding this is key when deciding whether to buy or lease.
Figuring Out Vehicle Depreciation
Ways to Estimate Depreciation
You can start by looking at average rates. New cars typically lose about 20% of their value in the first year. After that, they lose about 15% a year for the next four years.
Another option is to use online tools. Websites like Edmunds and Kelly Blue Book have calculators to predict how much your car will be worth later. Just enter the make, model, year, and mileage to get your estimate.
You can also check out current listings for cars like yours. Look at sites like AutoTrader, Craigslist, Facebook Marketplace, or Kijiji. This gives you real-time information on what people are paying for cars like yours right now.
Looking Up Current Market Values
Hands-on research is your best bet. Visit websites where people sell used cars. By checking listings for cars like yours, you get a clear idea of what they’re worth. This tells you how much value your car has lost since it was new.
If you see that similar models have sold for less, it’s a sign that your car’s value has also dropped. This practical method feeds you the latest data, allowing you to forecast accurately. Just remember, a car’s price depends on many factors, so try to look at as many listings as possible.
Comparing Buying Versus Leasing
Calculating Net Costs
When deciding between buying or leasing, you need to calculate the total costs for each option. Start by selecting the vehicle you’re interested in. For accurate numbers, get a quote from a dealership or check the manufacturer’s website.
- Price: Find the price of the vehicle for both buying and leasing.
- Down payment: Enter the down payment amount (if any).
- Interest rate (APR): Use the custom APR for financing.
- Sales tax: Check the sales tax rate in your area.
- Fees: Include any additional fees.
You’ll also need to estimate the annual depreciation rate of the vehicle, which is crucial for your calculation.
Here is an example table for a Ford F-150:
| Variable | Buy Option (48 months) | Lease Option (48 months) |
|---|---|---|
| Vehicle Price | $44,995 | $44,995 |
| Down Payment | $0 | $0 |
| Interest Rate (APR) | 1.99% | 4.49% |
| Sales Tax | 5% | 5% |
| Fees | $2,495 | $2,495 |
| Annual Depreciation Rate | 15% | 15% |
| Residual Value (after term) | – | 50% |
Adjusting Variables for Accurate Comparisons
Adjusting variables like the investment return rate and the annual depreciation can significantly impact the total costs. Use an online calculator to test various scenarios:
Investment Return Rate: This represents the opportunity cost of not investing your money elsewhere.
- Low return (3%): Tends to favour buying.
- High return (10%): Tends to favour leasing.
Annual Depreciation Rate: This affects the resale value of the car.
- Low depreciation (10%): Makes buying more favourable.
- High depreciation (25%): Makes leasing more favourable.
By adjusting these variables, you can get a clearer picture of which option might be better for you.
Financial Factors
Return on Investment
When considering buying or leasing a car, one key number to think about is the return you might get if you invested your money elsewhere. Imagine you’re considering the stock market as an option. If you think you can make a 10% return, it may not make sense to put that money into a car. For a safer investment, you may want to assume a 3-4% return. For a more balanced approach, 5-6% might be realistic. If you’re an aggressive investor, aiming for 7% or higher could be your goal. In our example, let’s assume a 5% return.
Predictions for Resale Value
The resale value of your car after 48 months is an important consideration. New vehicles often lose about 20% of their value in the first year and around 15% each year for the next four years. Several methods can help you estimate this:
- Research average depreciation rates: Most new cars lose 20% in the first year and 15% each year for the next four years.
- Online depreciation calculators: Websites like Edmunds and Kelley Blue Book offer free tools based on make, model, year, and mileage.
- Check current listings: Sites like AutoTrader, Craigslist, Facebook Marketplace, and Kijiji provide real-time data on car values.
Using these, you can better understand how much your vehicle might be worth after your leasing or finance term. In our example, we might aim for a 50% residual value after four years.
