You might look at the sticker price on a car or the monthly payment amount that’s drafted from your bank account and assume that that’s the cost of your car. But in reality, the cost of owning a vehicle is much more involved. Do you know the true cost of owning your car?
6 Factors That Influence the True Cost of Car Ownership
The sobering reality is that you’re probably spending way more on your car than you realize. But once you wrap your head around the real mathematics, you can make better informed decisions that lead to smarter financial outcomes (and greater peace of mind).
Here’s a close look at some of the additional factors that influence the true cost of car ownership:
- Financing
The cost of financing is one of the first expenses to account for. This is the interest that you’re charged over the life of your loan. If you’re charged five percent annually on a $20,000 loan over the course of five years, you’re ultimately going to pay $2,645 in interest. That amounts to roughly $45 per month in interest (on top of the premium payments).
When purchasing a car, it’s important to carefully analyze and compare car loan rates so that you can make the most cost-effective decision (not just on the day you buy the car, but over the long run). But even if you buy a car in cash, it’s helpful to consider this calculation. After all, there’s an opportunity cost (i.e. the amount you could theoretically earn if you invested the purchase price instead of buying the vehicle).
- Insurance
Car insurance is one of the major expenses, particularly for younger drivers. This figure is determined by a variety of factors, including some that you can influence (like driving record and type of vehicle) and some that you can’t (age and gender).
The good news is that insurance rates can be shopped around. So if you’re unhappy with the rate you’re getting with your current insurer, try grabbing quotes from two or three other companies. You may be surprised to learn how much they can vary from one to the next.
- Depreciation
Depreciation is simply the amount your car diminishes in value over time. And while you don’t technically write a check for depreciation every month, it’s something to consider.
In the first year alone, a brand new car loses between 20 percent to 30 percent of its value. Over each of the next five years, depreciation occurs at a rate of 15 percent to 18 percent.
There are ways to slow the rate of depreciation (like driving less and investing in preventative maintenance), it’s always going to occur at one level or another.
- License, Registration, and Taxes
We’re lumping all three of these together, though they’re technically separate line items. The total annual cost of these expenses is going to vary dramatically from one driver/car to the next. It depends on location (local tax rates), the type/value of car, and other related factors. Expect to pay at least $600 (cumulative), if not more.
- Maintenance
Every car requires some degree of ongoing maintenance. This includes both scheduled and unscheduled maintenance.
Scheduled maintenance refers to any sort of preventative maintenance and/or factory-recommended tasks. Unscheduled maintenance refers to repairs like replacing a car battery, buying new tires, or fixing a faulty engine component. (The more you invest in preventative maintenance, the less you’ll end up spending on unscheduled repairs.)
- Fuel
Fuel costs have been extremely low over the past couple of years. However, this is still a major expense for some drivers. If the cost of fuel is $2 per gallon, your vehicle gets 30 miles to the gallon, and you drive 60 miles per day, your daily fuel cost is $4. That might not sound like much, but extrapolate it over the course of one month ($120) or a year ($1,460) and the number does matter. Plus, if gas returns to higher price points, it can quickly become unaffordable.
So…What’s the True Cost?
Your car payment might be $300 per month, but is that the true cost of owning your car? Now that you understand how to analyze the cost of car ownership, you’re better equipped to properly budget for your next vehicle (or accurately estimate how much you’re currently spending). Either way, consider yourself a more well-informed car owner, which means you’re less susceptible to making ill-informed decisions that negatively impact your wallet.
