The Real Costs of Owning a New Vehicle
Your monthly payments are just the beginning.
Don’t for a minute think the monthly payments are where your expenses end when you buy a new car. Several other factors are involved with the real cost of ownership, some not so obvious. To help you grasp these various and not insignificant costs, KBB has created 5-Year Cost To Own, an exhaustively researched and continually updated buying tool that gives you, the new car shopper, a clear picture of the multiple expenses involved with owning a new car, even breaking it down to the cost-per-mile. Most important: By knowing these cost-to-own expenses, you can save yourself thousands over your ownership period. Here’s a look at the expenses that make up the real costs of owning a new vehicle.
This is the biggest expense, the decline in market value of your new car over time. The moment you drive off the lot, the clock starts ticking—and the value starts declining. Typically, the reality is that the more expensive the car, the bigger the hit. If your car goes down in value so much that you end up owing more money on your loan than the vehicle is worth, you are said to be underwater. Not a good thing.
How do you avoid going underwater? The best way is to pay cash for a new car, something that’s not practical for all but a few well-heeled buyers. The alternative is to make a big down payment and reduce the term of the loan. If that’s not possible, put as much down as you can and keep your car long after the loan period has ended; every month you don’t have to make a payment is like making money.
Shopping for the best value also helps, sometimes the less expensive car may cost you more over time. Two examples of depreciation, using KBB data: A basic 2016 Honda Accord, a 4-cylinder LX automatic with an MSRP of $23,840, will depreciate $7,730 in its first year, and $13,789 over five years. By comparison, a 4-cylinder 2016 Chrysler 200 LX priced at $22,990 takes a bigger hit, dropping $10,709 in value after its first year and by $16,705 over five years.
Liability insurance is mandatory for automobiles in all U.S. states except New Hampshire and Virginia. And its price varies widely, depending on countless factors such as the type and level of coverage, the make, model and year of the vehicle insured, the driving record, the age and gender of the primary driver, plus the area in which the car primarily is driven. The one constant here: Almost all of us must have insurance, and it’s a big expense that’s one of the most significant real costs of owning a new car.
According to KBB, the annual average insurance costs (collision and liability for a typical driver in California) for our 2016 Honda Accord LX example car is $1,205, which adds up to $6,025 over five years. Not surprisingly, our 2016 Chrysler 200 LX is a tiny bit more affordable, costing $1,155 per year to insure, or $5,775 over five years.
A few tips to keep insurance costs down: 1) Shop around. All major companies are competing for business, and it’s remarkably easy to get quotes over the phone or via the internet. 2) Bundle all your insurance needs (car, homeowner, life) with one company. 3) Raise your deductible (what you pay out of pocket for a claim). By doing so, your rates will come down considerably, assuming you’re able to maintain a clean driving record.
As much as we like to think of modern cars as appliances that need no maintenance, they still require some, even if it’s far less than before (when was the last time your mechanic needed to re-grease your car’s wheel bearings?). In the owner’s manual, you’ll see that oil changes, tire rotations, routine maintenance and various other inspections are mandatory at recommended service intervals to keep your warranty intact.
Although a number of manufacturers have plans that take care of all required maintenance for the first few years of vehicle ownership, maintenance fees can still add up. For proof, let’s again look at the 2016 Honda Accord LX and 2016 Chrysler 200 LX. According to the KBB 5-Year Cost-To-Own tool, the Accord has a first-year maintenance cost of only $71, which climbs to $1,932 over five years. The Chrysler, in its first year of ownership, also has $71 in maintenance fees. After five years, that climbs to $2,276. These amounts, for the record, are based on each manufacturer’s recommended service schedule, at national average labor costs.
As the auto industry trends toward smaller displacement and turbocharged engines in the continual quest to hit higher fuel economy standards, your gasoline bill still can be quite substantial if you drive a lot or if you need to own a large and thirsty vehicle for work or family.
The easiest way to check a vehicle’s EPA fuel economy? Read the pricing label in the window of all new cars for sale. There, in plain print, are the EPA city, highway and combined fuel economy ratings for that vehicle, plus its annual fuel costs. This number is calculated using 15,000 miles of driving (45 percent city/55 percent highway), with gasoline at the EPA’s projected price.
KBB projects annual fuel costs the same way, basing it on 15,000 miles of driving per year (45 percent city/55 percent highway), with fuel at a projected price. As such, the 2016 Honda Accord LX has an annual fuel cost of $1,132, and a 5-year cost of $6,632. The 2016 Chrysler 200 LX, similar in size to the Accord but a bit thirstier, will cost you $1,267 and $7,424, respectively.
What This All Means
When you factor in the costs above, plus other expenses such as taxes, license and registration—and the price of the financing itself—this much is clear: It’s not inexpensive to own a new car, and over the course of many years the various other costs can add up to more than the purchase price of the vehicle. For the record, KBB says the Honda Accord LX, at 46 cents per mile, is among the least expensive cars in its class to own and operate. The Chrysler 200 LX, at 51 cents per mile, is considered average.
While most buyers, truth be told, will remain focused almost exclusively on their monthly payments, smart shoppers will make better decisions—and potentially save thousands of dollars—when they understand and consider all of the other real costs related to owning a new car.