What Is the True Cost of Car Ownership?
Updated: May 10, 2020
The actual cost of car ownership goes much further than your monthly payments. Cars need consumables, like gas, brakes, and tires. To keep them street legal, you will also need to pay for insurance and registration. On top of all of that, you also have depreciation expense or how much value your car loses. The total costs can escalate quickly. If you genuinely want to buy a car, make sure you have accounted for all the costs and make an informed decision.
True Cost of Car Ownership
The 7 Major Costs of Owning a Car
Registration and Title Fees
You can’t legally drive the car until you get administrative things out of the way. The first is getting the state’s transportation agency to register and provide a title for it. (This may be a department or bureau of motor vehicles, depending on where you live.) Each state applies its own formula to calculate the registration and title fees. You can click here and check how much the charges should be in your state so that you can budget accordingly. Your state’s transportation agency website may also have the prices and forms available. If you are buying a new car, you will also need to pay sales tax on top of the purchase price.
In a 2019 study by ValuePenguin, the average American paid $941.65 per year for car insurance. Like interest rates, car insurance rates fluctuate drastically between individuals. There are so many factors that insurers consider: age, credit score, marital status, where you live, and work. They also consider how you use your vehicle, and how many miles you place on your car. To get an accurate insurance cost, you should get a quote from an auto insurance agent or a broker.
You must consider fuel expenses (unless you drive an electric car). Gas prices vary between companies, locations, and even times of the day. Your fuel cost will be tied to the fuel economy (mpg) of the car. It is also affected by road conditions and locations where you fuel. One thing: don’t base your fuel costs on information on fuel economy labels from the Environmental Protection Agency (EPA). Those labels are way too low.
There are two types of maintenance: preventative and corrective. Preventative maintenance is things you do beforehand to extend the life of the vehicle or promote safety. This may include oil changes, tire rotation and changes, and windshield wiper replacement. Corrective maintenance is things which you fix after a problem occurs. Replacing a spark plug or broken taillight bulb, or repairing your bumper after an accident qualifies as corrective maintenance. In general, luxury cars have higher maintenance costs. You may be able to perform some maintenance yourself. In other cases, it may be better and cheaper to leave some things to the experts.
This is the decrease in your car’s value over its useful life. Depreciation is a single most significant expense of owning the vehicle. A car can lose 20%-30% of its value over the first year. For the next five years, you can expect the value to decline between 15% to 18% each year, according to Black Book. Depreciation depends on characteristics of the car: total mileage, make, model, and the car’s condition. For reference, review the vehicles with the highest and lowest depreciation. You can also find out how much your vehicle depreciated by subtracting its resale value from how much you paid.
These are all the other incidental costs of owning the car. Parking fees, cleaning costs, and toll costs would be examples.
If you are financing or leasing the vehicle, you will also need to add interest costs to total ownership costs. As of 2019 the average APR on a new car loan is 4.21%. For example, if you buy a $36,000 car and finance it for 60 months, your interest costs will be $4014.60.
Would your interest rate be 4.21%? It depends on several factors. The interest rate you pay is determined by how much risk the lender will take on. Lenders consider your credit score, the loan term, and the age of the car to calculate your interest rate. In general, the annual percentage rate (APR) of an auto loan falls within 3%-10%.
Want to estimate the monthly payment and total interest of your auto loan? Check out our auto loan calculator. You should also use our car affordability calculator to determine better of how expensive of a car you can afford.
The Opportunity Cost of Owning a Car
One major thing that many people overlook when calculating the true cost of owning a car is an opportunity cost. Your opportunity cost is the value of the money that you lose by choosing one option over another. Consider the opportunity cost of buying a car versus investing the same amount for your retirement today. This is very important if you’re trying to build wealth since purchasing the vehicle will negatively affect this goal. To learn more about opportunity costs, check out this article on the Time Value of Money and Compound Interest. Then use the information in the materials to help you decide if you’re ready to purchase your next car.
Total Cost of Car Ownership Example
Jeep Wrangler with $36,000 purchase price and 48-month financing at 4.5%.
|Sales Tax (7%)||$2,520|
|Registration 4 years||$404|
|Gas 4 years||$10,920|
|Insurance 4 years||$4,200|
|Depreciation 4 years||$14,411|
|Regular Maintenance 4 years||$4,000|
|Cleaning, Parking, Tolls ~||$1000|
|Total Cost of Ownership||$41,859|
Jeep Wrangler is one of the least depreciated cars on the market with 12% per year. We used it as an example to show you the significance of the depreciation effect. The more expensive the car is, the bigger this expense will be.
Notice we didn’t add opportunity cost. Let’s say within these 48 months instead of buying a new car, you spent $20,000 on transportation and managed to save the rest at 5% while making a monthly payment to your savings account.
$41,859-$20,000=$21,859/48=$455 per month contribution
After four years total saved: $24,121
After 10 years (without payments): $32,539
After 20 years (without payments): $53,529
As you can see, even with our conservative assumption of 5% per year and contributions for only 48 months – the opportunity cost is high.
When you’re thinking about purchasing a car, you must consider the actual cost of car ownership. Without doing this, you may end up with a vehicle that you truly can’t afford. Review all the expenses so that you can budget correctly for the vehicle that meets your needs. Taking the time to figure this out beforehand means that you can manage your short and long-term finances better.
Agree. But sometimes it comes out that even without taking into account all that costs of having a car people are not realistic with themselves about where they are financially, where they want to go and what it’s going to take to get there. First and foremost they need to know what their credit score is and if it is not 650+ they need to get their credit repaired so they can walk into a dealership confidently knowing that they aren’t paying high interest or payments
Yes the last thing you want to do is walk into a dealership without knowing all of the numbers, get a monthly payment offer and then hope you will be able to make it.
Thank you for the article. Now calculating the total cost of owning the car becomes much easier. Now before buying a car I can make sure my auto budget is in line.
Thank you for reading. Hopefully now when you know true cost of car ownership, you will even consider if it is worth it
I am debt free and I have been saving for years now. I can pay cash for a nice car and still have money.
One of the main reasons I don’t have a car is I work downtown where I live and take public transit. Everything I need is at a walking distance from my place. So I don’t see the point in spending money on something I will not use and that will just sit there and will only be used on the weekends, maybe.
I think if you live downtown, it is way easier to use uber or something like zip car, than paying for parking and all of the car expenses
I think it depends a lot on where you live. Where I am in Alaska, things are very spread out and public transit is not reliable. So having a car here is a must.
For sure, if you live in a rural community a lot of times you can’t avoid having a car. It is still good to know all of the costs that go into owning a car, so you don’t just concentrate on the price and buy too much of car.
Cars are so tough. If you have to get a loan for a new vehicle, my best advice is to find something really common with cheap parts, sho that when it breaks its less expensive to fix. Good gas mileage too. I have a 2009 hyundai accent hatchback and i swear it its the most reliable car known to man, even though i did vastly overpay(my first car buying experience) I’ve had it for 7 years now and its always cheap and easy to fix on the rare occasion that something malfunctions
Buying a used reliable car is always a better financial choice, but you got to take emotions into account, the time it takes for repairs and a lot of people just don’t know that much about cars and don’t want to deal with the repairs.
Here’s what I’ll say. FEAR of repairs is a budget killer. That’s what drives people to get new cars when they’re not really needed. Acceptance of repairs is the better route, usually. That said, depending on what kind of VW you have, you may be better off getting a more reliable car. Some VWs have terrible reliability records. Toyotas are amazing and rarely break down, so you could even get a much, much older Toyota and be totally fine. I was in love with my Prius, and it went to 209k miles with minimal repairs, and the gas mileage was… Read more »
I agree, a lot of people just don’t want to deal with the repairs and people want to see themselves in newer cars as well. For some, like me the car is not just transportation. Otherwise, all cars would be Honda Civics.
My commute is so close to work that at the moment I don’t need a vehicle but when I get married and start a family I will get one then it will be the question of more comfort of going somewhere with children
and safety of children. If I had children, I would want to make sure that family hauler is as safe as it can be
Where I live we all have a bicycle – it’s a cheap and ecologically friendly means of transport. For long trips, one can always hire a car
I mean that’s ideal, bicycle keeps you in shape and you don’t have the car expense. It’s just not the case for people in rural communities or places where it snows like 9 months a year. Yeah you can ride a bike, but it is a pain!
I have a friend, though, who doesn’t drive. Used to. No interest now and no car. He rides a bike or train. Or walks. He is saving money hand over fist. ’cause that all car costs are always neglected when thinking of buying a car
If you live in a place that you can do it like a big city, it is always a sound financial choice and saves time because you don’t have to deal with the car’s maintenance.
Selling and paying off a car I never could really afford in the first place – was my best money snaert decision. Now I have an extra $340 a month (not including insurance sayings) to put towards my debt so it will actually go somewhere
Yes, cars can be detrimental to finances. The best bet is not to own a car, but this is not possible for many people. Koodos do you for paying your debt down instead of having car that you couldn’t afford.
Payment plus gas plus registration plus upkeep for me is about $500/month. But the payment is the biggest chunk of that and worth it for me to have a working car that doesn’t require a lot of maintenance and has a warranty. Peace of mind has value. I’ll keep this vehicle until such time that the maintenance is overwhelming.
And having my own vehicle, the freedom of it, the ability to travel, see my family, get around, manage the snow, etc is worth it, largely because I’m in an area that has limited public transportation and ample parking.
No doubt that having a new car and peace of mind are important. I would just make sure that you know what’s behind the “payment” as the same payment can be a smart financial decision or really detrimental to your financial future.
I keep track of all expenses. Even during covid, my rt commute is about 50 miles, but it is a hybrid. About 50 a month for gas, about 50 for insurance, 5 a month averaged for oil change, and about 2k depreciation the last year via kbb (might be due to covid for lack of demand)
Seems like you actually know everything that goes into owning the car. This is good and of course, if you have to drive 50 miles each day, you have to have a car.
$4,389.41 for 8,790 miles per year, including gas, insurance, registration, and depreciation. Right about $0.50 mile. I did just invest in some minor engine work and new tires this year so hoping to see that average drop over the next 3-5 years.
Wow, this is a business level calculation of the true cost of car ownership. This is great, we hesitate telling people which car they should buy, but we want them to know all of the expenses – which you do, awesome!