How to calculate true ownership costs
Mar 31 '01
The Bottom Line Base your purchase decision on the 6 factors below to get your total cost of ownership, and forget about what the payments are.
Based on the vehicles I see out there on the road, I think it's clear that many automobile owners have little real idea of what their vehicle costs them to own and operate. There are some cars that I can't belive anyone would ever buy, except for perhaps low purchase price. Many buyers believe that the vehicle with the lowest payment is cheaper. Others think buying a vehicle that gets better gas mileage is cheaper. Others think low purchase price equals low cost. Still Others consider maintenance costs, insurance, and reliability. While they are all on the right track, they can be totally wrong if they don't consider ALL the factors. In economic terms, SUV's are no different that any other vehicle when it comes to costs of ownership.
There are 6 primary costs associated with vehicle ownership. Some are more variable than others, but you must try to calculate them all, based over your expected period of ownership, to get a good picture of your true ownership costs.
1. INTEREST: More accurately, the opportunity cost of owning the vehicle. This could be the money you could have made if you paid cash for a car and hence weren't able to invest the money. If you paid cash for the car, you should calculate what you would have earned, minus taxes, by investing the money instead of using it for the car.
More commonly, however, this is the interest on your new car loan. Be aware that interest expense is much higher early in a loan than later(amortization). You should be able to calculate your own or have your banker print you out an amortization schedule so you can calculate your exact amount of interest.
It can be difficult for those w/o educations in finance to make these calculations, but you should try to find help doing so to get an accurate picture.
Low interest promotional loans can be a great way to save on a new car, but you should remember that if you sell the car before the loan is paid off, you will not reap all the savings you would have.
2. DEPRECIATION: This is probably the most overlooked and most expensive single cost of owning a new vehicle. There are guides available on the internet to help you try to forcast your car's future value. Get several figures and average them. There are also leasing guides that give "residual values" as a percentage of original MSRP. These are what are used in calculating lease rates. They are a good guide to which cars resale better. Finally, Kiplinger's magazine publishes an annual guide with resale values included.
Remember that if you tend to trade in vehicles rather than sell them yourself, you will get less for it, and your depreciation expense will be higher. Simply subtract what you expect the car to be worth when you sell it, from your purchase price, including fees and taxes, This is your total depreciation. Many people are shocked at how much their autos tend to depreciate early on. So, buying a vehicle that you will be happy with long term is often "cheaper" than buying a less expensive model you can't wait to unload in two years.
Generally, Pickup trucks and SUV's tend to depreciate far less than comparably priced cars, which is one reason for their surge in popularity. So, in most cases a $30,00 SUV will cost much less in depreciation than a $30,000 car. I think this may be because cars, especially fancy ones, rely more on their updated styling and "newness" than any utility value. Once the new wears off, so does their popularity. Cars are also redesigned more frequently than trucks and SUV's, so they will look "old" sooner. SUV's and pickups still have all their utility value, even after the paint has faded.
Some brands, like Lexus, Mercedes, and BMW, for example, are very expensive initially but partially offset this with very high relative resale values. Compare a $40,000 Lincoln Continental with a higher priced $42,000 Lexus GS 300. In 3 years you'd be lucky to get $17,000 for the Lincoln, a whopping $23,000 in depreciation. The GS 300 should bring $27,000 in 3 years, a much less expensive $15,000 in depreciation cost. So, which car really costs less? (btw, this is a good way to buy a cheap luxury car...find one that depreciates like crazy and nab it when it's about 2-3 years old.)
Depreciation is by far the hardest figure to nail accurately, but with some research, you should be able to get a reasonably accurate figure.
3. INSURANCE COSTS: This is simply a matter of calling your agent (and others) and finding out what it will cost to insure. Be sure to do this before buying, as some vehicles will give you a nasty "surprise" when your insurance bill arrives. Generally, if you have a good record and aren't buying something too exotic, your costs should not vary much if you're looking at similar classes of vehicles.
4. FUEL: I think this is one cost factor that is highly over-rated. Yes, you can save some significant money on fuel driving an economy car vs. driving a big land yacht. But assuming you actually have needs for a specific type of vehicle, (don't compare a Lincoln Navigator to a Honda Civic, for example) your costs really don't vary that much, within a class of vehicle. Assuming you drive 15,000 miles a year, a 24mpg car might only save you $188 a year vs. a 20 mpg car. (at $1.50/gallon) While nice, $15 a month isn't a great reason to choose a car. Consider fuel costs, but don't make it your top concern. In fact, I could argue that most "gas guzzling" SUV's are cheaper to operate than their comparably priced car cousins. This is because that while yes, they do use more fuel, they also have higher resale values. So look at fuel efficiency, but don't pick a car based primarily on that. You can achieve much higher fuel savings by simply driving efficiently and avoiding wasted trips (how many times have YOU been to the grocery store this week?) than by choosing a car that gets 2 mpg more than another one.
As an example, my father was once so into gas mileage that he bought an expensive (by 1980's standards) Audi 5000 turbodiesel because it saved him a couple of hundred a year in fuel costs over a gasoline model. Unfortunately, NOBODY wanted a used Audi Diesel come resale time, and it sold for thousands less than an identical gasoline model. It also was much noisier and left black soot all over the back of the car. His "fuel savings" evaporated into a loss of thousands in depreciation.
5. MAINTENANCE AND REPAIRS: This varies widely by vehicle type and brand. Luxury cars generally require more scheduled maintenance and it is more expensive than more common makes. They also cost more to fix when broken. Similar repairs on luxury vehicles can easily cost two or three times that of a simple vehicle.
Some vehicles are easier to work on and cost less to fix. Some require ridiculously extensive dismantling of your car to make even simple repairs. Look to see if there is a lot of open space under the hood, this isn't perfect, but is a rough guide. If things look crammed in, chances are the mechanic will have a tough time reaching things easily.
Some vehicles require little significantly expensive maintenance until well after you may have already paid it off and sold it. Others, however, do. A BMW 540i, for example, costs a lot more to simply maintain thant a Chevy Tahoe. Several hundred dollars per year more, in fact. The Tahoe simply requires little expensive maintenance for most of its first 100K miles. The BMW requires about $700 a year of "scheduled maintenance" that is required to keep the vehicle saleable and in warranty. BMW now offers "free maintenance" for 3 years as a perk of ownership. Of course this is simply rolled into the price of your new BMW. But it does illustrate how significant luxury car maintenance costs are.
Also consider things like cost of tires (try $700 for a set of Z rated tires on a luxury sports sedan that last about a year vs. $350 for a simple set of tires that might last 3 years on a more mundane sedan)
Vehicle reliability is a big factor in keeping costs down. Conversely, some very reliable vehicles cost a lot of money to maintain and repair. Generally, but not always, US made vehicles cost less to fix, but tend to break a little more often or have major components that just don't last as long. For example, a Lexus transmission might be $8000 to replace, vs. $2500 for a US model, but it will easily last 150,000 or more miles. Again, try to do as much research as possible to accurately determine the real costs. Consider the total picture. Your "bargain" car may not be such a bargain if you're replacing the transmission at 60,000 miles. Reliability is also a big factor in resale value. Just compare a 7 year old Hyundai to a Honda.
Consider the warranty length also, when determining repair costs.
6. Finally, you should factor in tag and advalorem taxes. States vary, but here in Georgia I paid $450 last year on a 4 year old BMW. I paid only $250 on a brand new Toyota Tundra pickup. Generally, the more expensive the car, the more expensive the taxes.
CONCLUSION:
Only when you've added up all the costs can you really know what it "costs" you to own a vehicle. I urge people not to be fixated on "payments". As long as you set a maximum budget that your cash flow allows, you should not really care whether your payment is $350 a month or $450 a month. Total costs are more important. You will often find that buying a slightly more expensive, better quality vehicle that is what you really like will be "cheaper" in the long run.
 |
|
|
|
|
|
|
Epinions.com ID:
brucec32
|
 - Top 500 |
|
Member: Bruce C
Location: Atlanta, GA
Reviews written: 131
Trusted by: 72 members
|
|
|
© 1999-2009 Shopping.com, Inc.