Q: What is Total Cost of Ownership?

December 17, 2013 12:53 PM

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A car is virtually a necessity unless you live in an area with good public transportation. Despite the usefulness of a car, it is an expensive investment. Whether you get your car new or used, you have to take a number of expenses into account when fitting it into your budget. The total cost of ownership includes several factors that come into play even after the car is fully paid for. You also need to consider insurance, fuel and maintenance costs, and registration costs over the period that you own the car. When you are looking into car financing, you must consider how much you have to pay to keep the car on the road.

Financing the vehicle, whether it's new or used, usually means taking out a loan to pay for it. This loan is for a set amount plus a certain percentage of interest. Naturally, this means you can expect to repay more on the loan than you originally borrowed, in addition to any administrative fees or other expenses.

The biggest new-car cost-of-ownership factor to consider is depreciation. When you get a new car, its value begins dropping as soon as it leaves the dealership. Over a period of five years, you can expect the value of a new car to drop by as much as 65 percent, reducing the amount of money you can get when you sell the vehicle. The good news is that you won't feel this expense until the time comes for you to trade in or sell your vehicle.

The next largest expense is likely to be fuel. Gasoline prices have increased drastically overall, more in some areas than in others. When you purchase a car, the dealer will tell you the mile-per-gallon measurement. This is an average between city and highway travel. In most cases -- hybrid vehicles often being a notable exception -- city travel yields fewer miles per gallon due to time spent idling in traffic. You cannot extrapolate fuel prices, but you can determine how much you drive and therefore how much you should expect to pay at the pump.

Maintenance includes things like tune-ups, oil changes, tire changes and balancing, brake pad changes, and even windshield-wiper replacement. Depending on your auto mechanic, you may be able to get a discount rate for bulk services. Your total cost of ownership may increase if you get a used car -- parts that fail will potentially cost hundreds of dollars to replace, thus offsetting the cheaper cost of the car itself.

Car insurance is a regular expense. It can cost hundreds of dollars for liability coverage, comprehensive coverage, and collision coverage. Your driving history, the cost of the vehicle, and other factors will influence the amount you pay for insurance. It's best to shop around to determine the cheapest and best insurance.

Ownership title and registration tags are two other expenses. The title is a single purchase, usually ranging from $200-$400. The registration, which is paid for yearly, will vary by state, and it can even vary by county.

Clearly, the total cost of ownership encompasses far more than simply purchasing the car.

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