Calculating Total Cost Of Ownership

Breaking Down Car Ownership Costs

Purchase price is where it all begins, but it's far from the only cost you have to pay when you're talking about the total cost of ownership for a car. The cost of ownership is the amount of money you'll spend over the entire time you own the vehicle. This includes the amount you pay for the car, maintenance, fuel, and insurance costs, to name a few. Here's a breakdown of what you'll pay over time and when.

Purchase Price and Financing Options

Purchase price is the first thing to take into account when you're searching for a new car, but it's not the only thing to consider. You also need to take into account loan costs, taxes, title, and registration fees, which vary depending on where you live.

Dealer fees and add-ons can really add up. Be careful of add-ons that aren't essential, or ones that you didn't approve. Common things found added on to loans include:

• Fabric protection
• Paint protection
• Rustproofing
• Extended warranties
• GAP insurance
• Credit insurance
• Additional financing fees

Though some of these are good to have, you can typically get them cheaper elsewhere, like through your insurance company.

Additionally, your interest rate will determine how much you pay for the vehicle in the long run. For example, borrowers with better credit may qualify for a lower interest rate, therefore paying less over time, since it costs them less to borrow money compared to someone with a lower credit score.

Don't forget to plan for taxes and registration as well. These fees can sometimes be rolled into your loan, but most likely you'll pay for them out of pocket. Most states have taxes that need to be paid, but not all states charge taxes, so it's important to know the regulations where you live.

Some states have higher sales taxes than others, especially on large goods like vehicles. Registration fees can also vary by state, sometimes costing under $100, sometimes costing much more. Some states charge a flat fee, while others go by vehicle weight.

Insurance Costs: What to Expect and Ways to Save

Insurance costs are rolled into your debt-to-income and payment-to-income calculations when a lender is trying to determine your eligibility. Typically, they allow for an insurance payment of around $100, but your costs will vary depending on many factors such as your age, driving record, and the vehicle you purchase.

It's also important to note that full coverage insurance is a requirement of a car loan, so you will have to take on a number of policies, such as collision, comprehensive, and property damage and liability. This can bring up the cost of insuring a car, but once you've paid off your loan, you can drop your coverage to whatever level you feel comfortable with.

Maintenance and Repair: Routine vs. Unexpected Expenses

Maintenance and repair are something that every vehicle will need from time to time. Some of these costs can be planned for, like routine oil changes and new tires, but other times things go awry, and you can't plan for the expense. In these cases, it's a good idea to have a plan in place and savings ready to fix any unforeseen problems.

Variable Costs vs. Fixed Costs

When it comes to total cost of ownership, there are both variable costs, which fluctuate and can be different for everyone, and fixed costs, which are a set price all the time.

Some examples of variable costs are fuel and depreciation. Each vehicle has its own MPG figures, and when you refuel is up to you. This leads to differing costs depending on the day. Additionally, gas prices change from day to day, making the amount you will spend on fuel unpredictable.

Depreciation – the loss of value over time – is inevitable, but new cars lose more of their value in the first years of ownership than a used car, which has typically already had its value drop. New vehicles can lose as much as 30% of their value in the first year of ownership, while losing only between 40% and 60% of their value in the first five years. This isn't set in stone, though, and all vehicles depreciate differently depending on the vehicle and how it's driven and cared for.

Fixed costs include things that don't change daily or month to month, like your loan payment, insurance premium, and the cost of yearly registration.

Hidden Costs of Car Ownership

We've already covered the main costs that you'll pay over the life of your vehicle, but there are smaller, sneakier fees that some people may have to budget for as well. These include the price of parking, tolls, traffic tickets, and customization. These aren't fees that everyone will encounter regularly, but they can impact the true cost of vehicle ownership.

Depreciation and Resale Value

Depreciation, like other costs, is part of your total cost of ownership. Essentially, the value of a vehicle will continue to decrease as it ages, so the longer you own a car, the less its worth to sell or trade. You need to know how much you're vehicle is worth if you plan to sell it or trade it in, so that you know if you're being offered a fair price. Plus, knowing how much your vehicle has depreciated will allow you to calculate your five-year total cost of ownership.

Total Cost of Ownership Calculation

A simple calculation you can use to determine your total cost of ownership is purchasing costs, plus operating costs, minus resale value. Your operating costs are everything we've mentioned above – financing, fuel, insurance, maintenance, taxes, and registration – added to the purchase price. Then, subtract the resale value of the car from this.

Here's an example of how a six-year cost of ownership may break down:

• Purchase price: $32,000
• +Financing cost (13% for 72 months): ~$14,108
• +Fuel costs (15k @ 28 mpg, $3.80 per gallon): ~$12,214
• +Insurance cost ($1,400/year): $8,400
• +Maintenance cost (average): ~$4,500
• +Taxes and registration (estimated tax rate 6%): $1,920
• -Resale value (end of 6 years): ~$14,400
• The total six-year cost of ownership is $58,742
• Cost per year on average: ~$9,790

The above example is for illustrative purposes only; your costs will vary. If you don't want to hash all this out by hand, many websites estimate your total cost of ownership, typically in a 5-year calculation.