The total cost of owning a car might be more than you think
The average price of a new car in America tops $33,000, according to car-buying site Kelley Blue Book, so buying a vehicle is a major financial move. While many consumers focus on sticker price or the monthly payment, that overlooks many other costs.
You have license fees, registration fees and taxes. You need to buy insurance, fill the gas tank, go in for regular maintenance. And your car loses value from depreciation every day you own it.
To help you understand the total cost of owning a car and figure out what you can afford, let鈥檚 take a look at these factors:
- What is the real cost of owning a car?
- What goes into the total cost of ownership?
- How can you compare costs for various models, including the 鈥渇ive-year cost鈥�?
What is the real cost of owning a car?
The average monthly loan payment for new cars in the fourth quarter of 2014 was $482, according to researcher Experian Automotive. But that $482 isn鈥檛 the whole cost to own that car 鈥� far from it.
For an average vehicle that鈥檚 driven 15,000 miles a year, all costs of ownership added up to $8,698 a year, according to AAA鈥檚 2015 Your Driving Costs听. That鈥檚 about $725 a month.
Costs vary by type of vehicle. Small sedans had an average annual cost of $6,729, or $561 a month, while a four-wheel-drive SUV cost $10,624, or $885 a month, according to AAA. So the SUV would cost you 58% more on an ongoing basis.
What goes into the total cost of ownership?
The real cost of owning and operating a vehicle includes:
- Fuel
- Tires
- Maintenance and repairs
- Taxes, license and registration fees
- Insurance premiums
- Depreciation
- Interest/financing
Fuel:听Do you use regular or premium gasoline? What kind of mileage does the car get? Average fuel costs were $1,682 per year, according to AAA.
But what you鈥檒l pay depends on the car you drive. Over five years, a family could spend $18,000 to fuel an SUV, compared to only $11,000 for a large sedan, according to Edmunds.com data.
Tires:听Tires are easily overlooked 鈥� until you need a new set. AAA estimates the average cost of tires at $147 a year. Tires with a 60,000-mile warranty will need to be replaced about every four years if you鈥檙e driving 15,000 miles a year. In addition to paying several hundred dollars for the tires, you鈥檒l also pay installation costs of $60 to $100 or more.
Maintenance and repairs:听How much will it cost for the scheduled maintenance recommended by the manufacturer, including oil changes, tire rotations, battery inspection and testing? What type of repairs will be needed, and how much will they cost? Total costs averaged $767 per year, the AAA study found.
Taxes and fees:听This category includes state and local taxes, license, title and registration fees, and other fees. Nationally, they averaged $665 a year, according to AAA.
Insurance:听For example, family-friendly minivans, which typically come with many safety features and are likely to have children as passengers, are cheaper to insure than high-end sports cars that are fast and expensive to repair, according to the Insurance Information Institute. Insurance rates vary from state to state, as well. You can preview rates in your area using.
Depreciation:听How much value the car loses each year is the single largest ownership expense, according to AAA. New cars can lose over 20 percent of their value in the first year, according to Edmunds.
Used car prices are influenced by supply and demand, so they鈥檒l depreciate more quickly if the market is flooded with used and off-lease cars for sale. Some models are known for holding their value over time, so look up the estimated depreciation of the cars you are considering on Edmunds or Kelley Blue Book websites. If a certain car loses value rapidly at a specific point, say, in the third year, you might consider selling it before it hits that cliff.
Interest/financing:听The interest rate and the length of your car loan affect your total cost of financing. Loans for new cars have been getting longer, with six and even seven years being popular lately, and the average length is now a record 67.2 months. The average interest rate was 4.56% for new car loans, according to Experian鈥檚 study in late 2014.
How can you compare total costs for various models, including the 鈥榝ive-year cost鈥�?
Once you鈥檝e narrowed down your choices to a few models in your price range, you鈥檒l need to figure out which will cost less over time. And you鈥檒l want to know which car will better hold its value, too.
Analysts talk about a car鈥檚 鈥渇ive-year cost to own.鈥� This estimate looks at fuel, maintenance and other costs, as well as how much the car is likely to depreciate over five years. This metric can be a handy way to compare cars. Sometimes a car with a cheaper sticker price actually costs more to own in the long run.
Car sites such as Edmunds and Kelley Blue Book feature five-year cost of ownership tools that allow you to look up specific models to find their estimated operating costs, including depreciation.
Each site uses uses its own proprietary data and methodology, so check a few. For example, KBB.com uses the price of a car鈥檚 five-year extended warranty as a way to project repair costs. And Edmunds.com includes another factor: federal tax credits that might be available for alternative-fuel vehicles, which can be worth up to $7,500. For example, purchasing a Toyota Prius Plug-in Hybrid might make you eligible for a federal听听of $2,500.
The bottom line
When you鈥檙e comparing cars you like, go beyond sticker price and monthly payment. Make sure you research the ongoing costs of driving and maintaining each model, so you鈥檒l get a true understanding of affordability. A realistic estimate of a vehicle鈥檚 total cost of ownership is crucial in helping you choose a car that fits your budget.
Jeanne Lee is a staff writer at NerdWallet, a personal finance website.
