Why Cost of Ownership is more important than getting a good "deal" when buying your next car.
Published on February 15th, 2021. Last Updated on .
When buying a new or used car or truck, most auto consumers are focused solely on the sales price of the vehicle. This is the single number that auto manufacturers, dealers, vehicle listings sites, and everyone involved in the marketing of vehicles want you to turn your attention. However, shopping for a vehicle based solely on the selling price, is not a smart move, and we’ll explain why.
What Makes Cars and Trucks Expensive
If you were to buy a new car for $40,000, drive it for 3 years, and then sell it to get your $40,000 back, that would be a great deal. Your ownership cost would effectively be zero, as you got all your money back. But, as we know, the world doesn’t work that way—and this is unrealistic. A more likely scenario is that you buy the same car for $40,000, and then 3 years later, you trade it in for a value of $25,000 or less. This results in a loss of $15,000 or more—roughly 40% of your vehicle investment. This reduction in value is called depreciation, and it’s what 99.9% of vehicle owners experience when they own a vehicle—and it’s one of the biggest reasons why vehicles are expensive to own.
Vehicle Costs Come in Many Forms
As mentioned above, depreciation is a major cost component of owning a car or truck, but there are many other costs on which consumers should also focus, and they are as follows:
- State and local taxes and fees
Collectively, these costs are the reason why cars and trucks are expensive to own and operate. While parking, tolls, car washes, and many other things add to this, those listed above are what really puts a dent in the wallets of vehicle owners.
The Purchase Price is Only a Starting Point
When purchasing a new (or used) car or truck, the initial purchase price is only the beginning of determining what it will cost to own and operate that vehicle going forward. The 6 cost areas listed above then kick in, and that’s where the expenses start to get costly.
The first big expense, depreciation, occurs as soon as you drive a car off of the dealer’s lot. This is especially the case with new cars, as the average new car loses 23% of its value in the first year alone. With our example of a $40,000 new car, that’s a cost of almost $10,000, just in the first year alone. Although this rate of depreciation will slow as the vehicle ages, it never really stops, as the older a vehicle becomes, with more miles on it, its value will continue to fall. CarEdge demonstrates how this happens with its Depreciation Calculator, where you can see how far and how fast vehicle values fall.
Depreciation is Half of the Story
As big as the depreciation cost is—and it’s a big one—it represents only 47% of the total cost of owning a vehicle over a 5-year period—less than half the cost of ownership. The runner-up for the next biggest cost of owning a vehicle is auto insurance. This is an area where the costs can run from reasonable and appropriate, to crazy and out-of-control. CarEdge has an Insurance Calculator that will give you your estimated insurance costs for over 250 vehicles. While much of the cost will depend on the vehicle you purchase, most of the cost will be a function of you as a driver, and the insurance company that you use to insure your vehicle. On average, insurance costs represent 20% of the cost of owning and operating a vehicle.
Of course, if you expect to actually drive your vehicle, it will have to have some fuel to make it go. And, you’re eventually going to need oil changes, new brakes, new tires, or new batteries. And then, everyone once in a while, something will go wrong with your vehicle, and it will need a repair or new part, which piles on additional expenses. Check out CarEdge’s Maintenance Calculator, which will show you the expected maintenance expense and likelihood of a major repair for hundreds of models.
On average, fuel costs will represent 17% of your cost of owning a vehicle (assuming 13,500 miles per year), and maintenance and repair expenses will add another 5% to your overall costs. These costs are fairly predictable, and while you can shop for the cheapest gas in town, it basically is what it is. However, when it comes to maintenance costs, there is a huge difference between vehicle brands, as not all cars and trucks are built of equal quality, or cost to maintain. CarEdge ranks all of the brands on their Maintenance Costs, so you can see the winners and losers in this category.
Financing a Vehicle Can be a High-Cost Proposition
If you have the financial flexibility to purchase a vehicle for cash, do it. Very few people have this ability, however, and as a result, they have to finance at least a portion of the purchase price. The financing of a vehicle can either have very little impact on your cost of ownership – if you finance a small amount at an attractive interest rate. Or, it can have an enormous impact—if you get a big loan with a high interest rate. Depending on your credit score, the costs can vary widely, and CarEdge explains to you what you can expect with your credit score.
As vehicles depreciate rapidly, many vehicle owners find themselves “upside down” in their car loan, where the balance on their loan is actually greater than the value of their vehicle. Recognizing that this is a big problem for many, CarEdge created a very helpful Loan Calculator that allows vehicles shoppers to explore the appropriate terms (and appropriate vehicles) to avoid being in this “upside down” position. Site visitors can try numerous loan scenarios with hundreds of different car models, to see how they can find a vehicle whose value holds up better than the loan balance.
On average, interest charges represent 11% of the cost of owning a vehicle, although, as we mention above, this percentage can go much higher, if you try to buy a vehicle that is out of your price range, or you have a less-than-perfect credit history. In many instances, over 20% of the cost of owning a vehicle can simply go towards paying interest on the loan. Be careful not to buy more vehicle than you can afford, as this is a bad path that you want to avoid to keep your personal finances healthy.
State and Local Taxes and Fees Can Come out of Nowhere
States, cities, counties, and local townships all want their piece of the pie when it comes to you and your car. Auto sales tax rates can be over 11% in some states, and while others may be at or near 0%, there is almost always a tax or fee charged by some municipality. Many states, cities and local entities charge property taxes, excise taxes, transfer taxes, vehicle license fees, title fees, and all kinds of things that cost you to own a vehicle. (Some auto research sites will show you the cost of a State Registration Fee, but that fee is just a small piece of the state and local fees that an average driver pays each year, and a negligible portion of the total cost of ownership.) Before you buy a car, check out all of the taxes and fees that are charged in your respective state. Here’s a handy site just to check on the sales tax alone, but be careful, there’s likely more fees and taxes ahead for you and your vehicle.
All of These Vehicle Costs Add up to Big Dollars
Owning a vehicle can be expensive, and many of the costs are unavoidable. In total, depreciation, maintenance/repair, insurance, financing, and fuel costs, average over 100% of the sales price of a vehicle in a 5-year period. So, in our example of the purchase of a $40,000 vehicle, it will cost the average consumer $45,200 over a 5-year period, or over $11,000 per year—and that is before we include any state and local taxes and fees. In this example, the costs would look like this:
|Expense Category||5-year Expense Total||% of Total Expense|
You have the ability to control and manage many of these costs, however, by making good decisions. As we discuss above, vehicles depreciate at very different rates, so finding a vehicle that holds its value better than others is a big step in keeping your vehicle costs low. Choosing the right vehicle will also make a big difference in your maintenance costs and fuel costs too. Here are the vehicles that are the least expensive to maintain.
How you pay for and insure your vehicle are both areas where you have a lot of flexibility in picking a lender or insurer that provides you the best terms at the best price. Use our Financing Calculator to find a vehicle and loan structure that makes sense for your family. Also, compare insurance quotes from credible insurance companies, so that you have a better chance of finding competitive insurance rates.
The “Total Cost of Ownership” is the Number to Focus on – Not “Price”
As we outline above, all of these auto-related costs are manageable—it’s just a matter of doing your homework. Knowing, however, that none of us have time to do a lot of homework, CarEdge has created a Cost of Ownership Dashboard which provides you both an overview and an in-depth analysis of all of the costs of ownership for over 250 vehicle models. The interactive tools on the Dashboard can be used to compare vehicles for their ability to hold their resale value. We also have rankings to show the best and the worst for depreciation, insurance costs, maintenance costs, and total cost to own.
In a perfect world, we would make ourselves as informed and educated as possible before making a big purchase, such as an automobile. But, few people have the time and desire to search through the endless information that is available online about what they should buy. Unfortunately, the vast majority of websites that provide this type of information are actually trying to sell you a car—either themselves, or for others. CarEdge does not sell cars and it does not promote cars for the benefit of others. CarEdge.com is a consumer advocacy site for car shoppers, and it is our goal that you have the information you need—all in one convenient place—to educate yourself about your next car purchase.
Good luck and happy vehicle shopping!