Is Buying a Vehicle a Good Investment?

Your vehicle provides value because of the numerous benefits it offers, such as the ability to get to work and travel for recreation. In that regard, buying a vehicle is a good investment in your employability and quality of life. However, when it comes to financial returns, vehicles are generally not considered good investments. Let’s explore why.

Why Aren’t Vehicles Considered Good Investments?

Most vehicles rapidly lose value the moment they leave the dealership lot. Because the value of a car typically decreases almost immediately after you purchase it, a car is not considered a good investment. Here’s why.

Depreciation

Buying a car is usually a bad investment decision. In fact, in most cases, buying a vehicle may not be considered an investment at all because cars depreciate in value. This doesn’t mean buying a car is a bad decision—it serves an essential function for many people. But in terms of dollars and cents, it shouldn’t be viewed as an investment. While you may buy a home or stocks with the expectation that your investments will appreciate over time, vehicles are a different story. They typically depreciate quickly and eventually become worth much less than the total amount you spend on them.

Ownership costs can be quite high. According to 2022 data from AAA, the average annual cost to own a mid-priced new vehicle, including gas, maintenance and repairs, insurance, and other expenses, is $10,738 per year. That’s a lot to pay for an asset that depreciates in value.

High Initial Costs

As mentioned, vehicles usually aren’t considered good investments because of their depreciation, which can vary by vehicle. According to auto insurance company Progressive, new cars can lose up to 20% of their value within the first year of purchase and another 15% each year through the first four or five years of ownership.

Depreciation typically slows by the five-year mark, by which point the vehicle has likely lost roughly half its value. The vehicle’s value will typically bottom out after about 10 years. Following this pattern of depreciation, the car you purchase for $35,000 would be worth about $17,500 after five years and will have lost half its value due to depreciation.

Another point of consideration is the high cost of a new vehicle. Kelley Blue Book data from April 2023 reports the average cost of a new car is $48,275, and electric vehicles are priced at an average of $55,089. With such a substantial expense, you may want to use depreciation to your advantage. Even buying a one-year-old used vehicle may save you 20% in first-year depreciation costs.

Do Some Cars Increase in Value?

While many cars depreciate, some models can actually appreciate over time, especially certain classic and luxury cars. For example, classic cars, muscle cars, and other rare autos can command prices multiple times higher than their original purchase price. However, since the future value of these cars depends on a variety of unpredictable factors—not to mention potentially expensive upkeep—they’re generally not considered a wise investment strategy.

Other Investment Options

While a car is necessary for most people, it’s typically not a wise financial investment. Here are some investment alternatives that may be better options.

Stocks

When you buy a stock, you’re buying an ownership share 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 investment options, especially vehicles. The S&P 500 index, which tracks 500 large company stocks, has averaged yearly gains of about 10% since it started in the early 1920s.

Bonds

Companies and government entities issue bonds when they need to raise capital. So when you purchase a bond, you’re giving the issuer a loan. In exchange, the issuer will repay the loan on the maturity date at the end of its term, which usually ranges from one to 30 years. In the meantime, bonds pay you an annual interest rate, typically every six months. Many investors prefer owning bonds over stocks because they’re usually less risky and provide a predictable income stream.

Mutual Funds

If you’d rather not research and choose stocks on your own, a mutual fund may be right up your alley. Mutual funds allow you to purchase a large amount 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, such as emerging international markets or major U.S. companies.

Retirement Accounts

Retirement accounts, like 401(k)s and individual retirement accounts (IRAs), are savings accounts that allow you to set aside money for your retirement with tax benefits. For example, a traditional IRA lets you deduct contributions now and pay taxes when you make withdrawals in retirement. Conversely, a Roth IRA requires you to pay taxes on contributions now but allows tax-free withdrawals in retirement. These plans, which are often provided by your employer, offer a powerful way to grow your retirement savings, especially if your company offers an employer match.

Real Estate

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

These examples are just a small sample of your different investing options. While these investments can offer a better long-term ROI than a vehicle, they carry their own risks. Before proceeding with any investment, weigh the pros and cons and consider consulting a financial advisor to ensure it fits within your overall investment strategy and financial goals.

The Bottom Line

While buying a vehicle may not be a good investment, sometimes it’s a necessity. If you plan on financing your vehicle purchase, take steps to pay less interest on your auto loan. For example, getting a shorter-term loan, such as a 48-month loan instead of an 84-month loan, may help you secure a lower interest rate.

Additionally, take a moment to review your credit report for free to ensure there aren’t any issues that could hurt your loan approval chances or interest rates. While you’re at it, check out your FICO® Score, the score used by 90% of top lenders. If your credit is less than ideal, consider pausing your car-buying efforts and improving your credit before applying for financing.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with all your mortgage requirements and ensure you get the best possible service.