Owning a car is expensive, everyone knows that, but very few people stop to consider the true cost of a car. The financial cost of owning a vehicle doesn’t start and end when you agree to the purchase price of the car, or what interest you have to pay on the auto loan.
To get the true cost of owning a car, you have to factor in its depreciation (the “value thief” that decreases the car’s resale value), auto insurance, fuel costs, maintenance and repairs, add-ons, and taxes. Understanding and budgeting for all the costs associated with owning a car, as well as following proper maintenance schedule can help you figure out what you can actually afford and also improve the resale value of your car.
So, what is the true cost of owning a car? Let’s take a look at the various expenses and how they can add up.
According to Kelley Blue Book, the industry-wide average cost of a new car as of January 2018 was $36,270. Yes, that is a lot of money, but the average consumer is not buying a new car every time the calendar flips over, that payment is made in installments over the duration you own the car. Research shows that the average length of time that a driver keeps a new vehicle is roughly 6 years. Many people sell their car in the third year, but if you hang on the car for the entire 6 years, then you’re looking at an average monthly cost of $508 if you bought without a down payment.
When discussing the true cost of owning a car, depreciation should always be the first thing to consider. This is because, new cars in particular experience rapid depreciation as soon as it is driven off of the dealership. Very few people think about depreciation in this way, but it’s very much a real cost since it shows the loss in resale value of the vehicle over its lifespan.
According to a report by Cars Direct, on average, the resale value of a new car depreciates by 20% immediately you drive off of the car lot, then around 15% every other year thereafter. Though these are just averages and individual depreciation rates rely heavily on the total mileage, make and model, and the condition of the car, the numbers are pretty close to accurate.
The average cost of fuel is $1,650, or 11 cents per mile. In 2014 it was about $265 lower due to the fall in oil prices since the middle of the year, which explains why the total operating cost was lower. You should note that these figures are just averages based on national statistics. The amount of money you spend yearly on gas will depend on the road conditions, the fuel economy of your car, how often you drive the car, and the price of gas in the place you live, all of which vary widely.
Of all the costs you need to consider in order to arrive at the true cost of a car, car insurance cost is the most difficult to determine without adequate information. The average per year is $1,115, but this depends on everything from your driving history, age, credit score, marital status, the state you reside in, and the type of car that you own.
Auto insurance premiums vary from state to state, your best bet to find an insurance plan that is good for you is to search the internet for ‘free car insurance quotes’ and compare what you find. Another popular option is to ask friends and family to recommend good insurance companies, but you still need to do your research and compare plans.
Here the average is $668 per year, but by now you should know that numbers like this vary greatly per state. For instance, some states have relatively minor registration fees, whereas others have what’s known as ‘ad valorem/excise’ taxes, where you are taxed on the value of your car that depreciates each year.
You won’t have repair costs to deal with if your car is covered by the factory warranty –typically last three years or 36,000 miles, but if you are no longer covered then you need to stash some money for repairs.
According to AAA, the average cost of tires, repair, and maintenance is about $100 monthly for a new car. What constitutes maintenance cost includes tire rotation and oil change, which are recommended to be performed every 5,000-mile interval, or thrice each year.
In reality, this number might be higher or lower than that. How much you actually pay for repairs depends on the age of the car, how often you use the car (i.e. if you only drive to and from work, you’ll need less oil change than an Uber driver), the weather condition, and of course, your ability to DIY some of these routine repairs versus taking the car to the mechanic’s place.
Assuming you made a 10 percent down payment, with a five-year loan and average credit when you bought your car, then you’re looking at $670 per year, according to the average. The actual amount you pay will vary based on the size of your down payment, your actual credit, and the length of your loan.
I’d like to stop and emphasize once again that these numbers presented by AAA are averages calculated from nationwide statistical data. The age of a car also plays an influential role in calculating the cost of owning.
For instance, according to a report by USA Today, the average price of a new car in 2015 was $33,560. So if the resale value of a car takes a 20% hit as soon as you drive it off of the car lot, then you’re looking at $6,712 lost in its first year only. The AAA estimates the cost of owning a car in the first year to be $11,756 – almost double the depreciation.
By the fifth year, your depreciation expense would drop about a third to $2,477, and the total annual cost of owning the car ill also drop to $7, 523. But, of course, since not all states charge you ad valorem taxes and even those that do so calculate it based on the depreciated value of the car, this number will be slightly lower in the fifth year.
By the tenth year, depreciation expense on the car will drop to roughly $1,102. In the tenth year, you could also drop collision and comprehensive coverage to lower insurance costs on your auto, which will cut the average cost of insuring a car by $554. By now the financial charges on your car should (or would) be long gone, chopping another $659 off of the annual cost. And it’s expected that your maintenance cost should be higher by the tenth year, so likely looking at about $1000. This brings the net annual cost of owning a car in the tenth year to $5,920, almost half the annual cost for the first year.
From what we’ve seen so far, holding on to your car a little longer than 6 years significantly cut down the cost of ownership. A new car bought for $33,560 in 2015 will cost:
But then, getting a quality used car can go a long way in reducing these numbers. From the illustration, it’s easy to understand how depreciation and other expenses add up on a car that just left the lot.
Though it looks like keeping a car for a long time is better, aside from the higher maintenance cost, getting a new car comes with lots of security and safety features, as well as improved fuel economy. Whether you decide to trade in the old car or keep it longer is really up to you.
Most people seem to agree that owning the car for longer is the way to go. According to a FOX news report, the average age of a car in the US now stands at 11.5 years. So, if you want to save a significant amount of money simply keep up with scheduled maintenance of the car so it runs smoothly. Know when you need to change your belts, battery, air filter, oil, and keep an eye on your tires and check your manual for when you need to rotate or replace them. Top up coolant, brake fluid, and remember to refill before you run out of gas.
For starters, if you don’t drive much or don’t really have a pressing need for a car, then leasing one might be the way to go.
If you can get where you need to be using public transportation, you should give serious thought to the merits it provides. Other than the fact that someone else does the driving, public transportation can significantly reduce your monthly transportation expenditure. Vanpools, subways, buses, and trains are all relatively inexpensive options to get to work, plus you do not pay for maintaining them.
Another fantastic option is carpooling. You don’t always have to drive everywhere just because you own a car. You can take turns with a friend to save money on gas cost and also reduce wear and tear on your car.
If your work routine isn’t fixed and as such can’t rely on public transport to be available when you need it, then consider getting a small car. Still, remember those numbers we talked about? A sedan will likely consume around 50.3 cents of gas per mile compared to driving a gas-guzzling SUV. Still on saving cost, do not get an eight-cylinder engine if four cylinders will give you what you want. Except you’re routinely hauling heavy cargo, you’ll be burning extra money on gasoline to run the bigger engine.
Irrespective of what you’re driving, try to drive it less often. Walking or riding a bike every now and then is good for your health as well as your finances.
Regardless of how you get around the city, you need to take the time to calculate the true cost of a car so you know how much you’ll be paying for a vehicle and avoid some mistakes new car buyers make because the price advertised on a vehicle is far from the true cost of owning a car. Other expenses such as gas, maintenance, and insurance can drive up monthly and annual costs. Keep an eye on your expenses, so you can keep more money in your pocket.
Here’s a nice video that summarizes everything.
