Is Buying a New Car a Good Investment?

How Vehicle Value Changes

A new car begins to lose value the moment it is driven off the dealership lot, a process known as depreciation. Unlike many traditional investments, a car is a depreciating asset that steadily loses its market value. This initial drop is often the most substantial, with some sources indicating a loss of around 10% in the first month alone.

After the initial period, a new car typically loses about 20% of its value within the first year. This rapid decline continues, with the average car shedding approximately 30% of its value over the first two years of ownership. By the end of five years, a new car may have lost around 60% of its original purchase price. This consistent reduction in value is primarily due to factors like accumulated mileage, general wear and tear, and the introduction of newer models with updated features.

The rate of depreciation can vary depending on the make, model, and condition of the vehicle. Luxury cars and electric vehicles may experience higher depreciation rates compared to trucks and hybrids, which tend to retain their value better. A new car’s value will almost always decrease over time, impacting the owner’s equity and overall cost of ownership.

The Complete Financial Picture of Car Ownership

Beyond the initial purchase price and depreciation, owning a new car involves a range of ongoing expenses. Car insurance is a significant cost, protecting against financial losses from accidents, theft, or other damage. Full coverage car insurance averages around $2,149 to $2,679 per year, varying by factors like age, driving history, location, and vehicle model. Minimum coverage costs significantly less, around $618 to $808 annually.

Fuel expenses represent another substantial and variable cost, influenced by driving habits, fuel efficiency, and fluctuating gas prices. This is a consistent outflow for most drivers. Routine maintenance and unexpected repairs also contribute to the total cost. Owners should budget approximately $900 per year for routine maintenance and potential repairs, though this figure can fluctuate based on the vehicle’s make, model, age, and driving conditions. More significant repairs, such as an engine replacement, can cost thousands of dollars.

Additional financial obligations include annual registration fees and various taxes. State and local taxes, such as sales tax on the vehicle’s purchase, can add a considerable amount to the initial cost. For those who finance their new car, interest payments on the loan represent a notable expense. The average interest rate for a new car loan was around 6.73% in early 2025, but this rate can range from approximately 5.18% for those with excellent credit to over 15% for those with lower credit scores. These collective costs illustrate that the financial commitment of car ownership extends far beyond the sticker price.

Other Ways to Acquire a Vehicle

Buying a used car is a common alternative, offering a lower initial purchase price and a slower rate of depreciation compared to new vehicles. Since the most significant depreciation occurs in the first few years of a car’s life, a used car has already absorbed much of that initial value loss. Its value will decline at a more gradual pace, resulting in a more financially stable asset.

Leasing a vehicle provides another option, characterized by lower monthly payments than purchasing a new car. Payments cover the vehicle’s depreciation during the lease term, not its full purchase price. Lease agreements do not result in ownership and often come with mileage restrictions and penalties for excessive wear and tear. At the end of a lease, the driver can return the vehicle or purchase it, offering flexibility but no equity build-up. This arrangement suits those who prefer to drive a newer model every few years without long-term ownership.

For individuals with minimal driving needs, non-ownership models like ride-sharing services or public transportation offer a distinct approach. These options eliminate vehicle depreciation, insurance premiums, maintenance costs, and financing charges. While they may offer less spontaneity or convenience, they can be more cost-effective for those who drive infrequently, as expenses are incurred only when the service is used.

Elements Influencing a Car’s Resale Value

While all cars depreciate, certain characteristics and conditions influence the rate at which a vehicle loses value and contribute to a stronger resale price. The make and model play a substantial role, with some brands demonstrating better value retention due to their reputation for reliability, durability, or market demand. Toyota and Subaru models often rank highly in retaining their value. Conversely, some luxury vehicles may depreciate more rapidly.

The physical condition of the vehicle, including its maintenance history, cleanliness, and accident record, directly impacts its resale value. A well-maintained car with regular servicing and a clear record of care fetches a higher price. Keeping detailed service records demonstrates responsible ownership. A clean interior and exterior, free from dents or scratches, enhance its appeal. Vehicles involved in accidents may see a reduction in value.

Mileage is another factor; lower mileage indicates less wear and tear, making a car more desirable in the used market. Certain features and even color can influence resale value. Popular optional features like power accessories, leather interiors, and modern infotainment systems can increase desirability. Common colors like white, black, and silver are popular, but some less common colors might retain a higher percentage of their value.