Whether you buy a new or used vehicle, there are certain costs associated with car ownership. The most obvious is the out-the-door price, which is the bottom line number you’ll pay the dealer or private owner when she places keys in your hands. Knowing these costs, or at least having a grasp of what your car will cost you over the next several years, will help you budget accordingly. It might also help you avoid having deep regrets for making the wrong purchase.
Your Ongoing Expenditures
We’ll examine the likely expenses for a new vehicle through five years of car ownership.
1. Financing or leasing. Unless you paid cash for your car, you’ll probably finance your vehicle for three to seven years or lease it for two or three years. You’ll make payments every month until your loan’s paid off or until the lease expires. This is usually your greatest cost, and it includes the principal, interest and any other costs charged by the lender. For example, if you’ve financed your car with a $1,000 down payment and monthly payments $250 per for 60 months, your cost is $16,000 after five years.
2. Registration and taxes. You’ve bought your vehicle and now you’ll have it registered and titled in your state. Typically, you’ll pay an annual registration fee. In some states, you’ll also pay yearly property taxes. Some states assess a flat rate, while others base fees and taxes on weight, value, age or certain other factors. If your annual cost here is $100, you’ll have paid $500 after five years.
3. Auto insurance. If you purchase a vehicle and take out a loan or lease it, the lender will require certain types and levels of coverage, including liability, comprehensive and collision insurance. Even if you pay cash, most states require minimum levels of liability coverage. Insurance premiums are usually charged twice annually, and it’s possible to make monthly payments. At $80 per month, you’ll pay $960 per year or $4,800 after five years if your rate and coverage do not change.
4. Maintenance and repairs. Your cost of ownership can quickly mushroom once repairs become a factor. However, by following the maintenance schedule outlined in your owner’s manual, some repairs may not be as severe. For example, if you regularly replace brake pads and shoes, you can avoid more costly repairs involving brake rotors, drums and calipers. It’s important to adhere to the manufacturer’s recommended intervals when changing the oil and oil filter, swapping out the air filter, rotating tires, flushing the transmission fluid and so on.
If you buy new, some manufacturers cover expenses associated with basic maintenance. For example, the ToyotaCare plan covers normal factory scheduled service for 2 years or 25,000 miles, whichever comes first. Expect your costs to increase as your car ages. For a new car, we’ll assume a conservative $1,500 in maintenance and repair costs over five years.
5. Fuel. Unless you purchase an electric vehicle, you’ll be making regular visits to the fuel pump. You can estimate what this cost will be by visiting the FuelEconomy.gov website and looking at your vehicle’s mileage.
For example, a 2014 Dodge Dart with a 1.4-liter four-cylinder engine and a six-speed automatic transmission makes an EPA-estimated 30 mpg for combined city and highway driving. If you drive 12,000 miles per year, divide that by 30, and you’ll use 400 gallons of fuel annually. At $2.25 per gallon, you’ll spend $900 per year or $4,500 for five years if gas prices hold steady and your driving habits stay constant.
The Cost of Depreciation
You probably understand that your vehicle loses value over time. It’s rare for cars to increase in value, and the only models that pull this off are classics and a handful of exotics.
Depreciation represents a loss in value and begins the moment you drive that shiny new car off the dealer’s lot. In fact, new vehicles drop an average of 10 percent as soon as you take ownership, and they can lose as much as 60 percent of their value over five years. This means the car you purchased for $25,000 new may be worth only $10,000 after five years.
The Real Cost of Car Ownership
So, what is the real cost of car ownership? In our fictitious example, your ongoing expenditures would be $27,300 ($16,000 + $500 + $4,800 + $1,500 + $4,500). Add in $15,000 depreciation and your cost of ownership would be $42,300 after five years.
Determining the five-year cost of ownership before buying will help you make an informed purchase decision. Considering a late-model used car may be a better option. Here, your out-the-door cost is lower, which may also reduce your registration and insurance costs. You’ll also experience less depreciation, since vehicles suffer the steepest depreciation during the first couple years of ownership. Just keep in mind that you’ll need to budget for repairs on older vehicles. You can also lower your costs by choosing a vehicle that offers excellent fuel economy.