The Real Cost of Car Ownership

When figuring out if you can afford a new car, many people look at the monthly payments on an auto loan. If they can swing the payments as part of their budget, they are ready to make the purchase. While the loan payments are an important part of owning a vehicle, the total cost of ownership includes much more. To ensure you can really afford that vehicle you have your eye on, you need to know the real cost of car ownership and how it fits into your budget.

The average cost of car ownership

According to AAA, the average cost of ownership was $797 per month in 2020, which translates into $9561 each year. This uses a vehicle that puts on 15,000 miles a year and includes all that goes into ownership costs.

Compare this $797 to the average monthly payment on a new car loan, which is $575, according to Experian. About $120 per month more, which can make a big difference on a tight budget or if you bought a car at the top end of your range.

What expenses are included in the cost of ownership?

To determine how much it costs you to own your vehicle, you’ll need to add in the monthly car payment, monthly insurance, and gas you use each month. You’ll also need to figure the annual registration fee and divide it by 12 to get the monthly cost.

Don’t forget maintenance and repairs because these are the silent expenses that can get you into financial trouble if you aren’t prepared. Maintenance is fairly easy to figure based on mileage for each year. In general, you take the maintenance costs for five years and divide by 60 to get the monthly costs.

For example, you would need to calculate the cost of an oil change and multiply by the number of oil changes you would need each year based on how many miles you drive. You’ll also need to calculate other maintenance expenses and expected repairs during the first five years of ownership as well.

If you don’t want to do all that work, you can use the average cost of repairs, which is about $113, according to AAA. However, you’ll need to add to that total if you drive more than the average or do mostly city driving.

Include depreciation

While all of these expenses make sense when calculating the cost of ownership, you don’t want to ignore depreciation. Vehicles lose value over time with most of it being deducted within the first year or two. You’ll want to consider this as an expense even though it doesn’t come out of your budget.

Most vehicles lose at least 20 percent of their value within the first year. You can check out Kelley Blue Book to find out the value of your vehicle. Then subtract it from what you paid to know the depreciation amount.

Why does this matter? Because you won’t get more than the value of your vehicle as a trade-in or if you were to sell it.

How to save on the cost of car ownership

So, now that you know how to calculate the cost of owning a vehicle, how can you save money? Financial experts advise that you spend less than 20 percent of your budget on the total cost of your car. If you see that you’re going over that amount, the easiest way to cut down on the costs is by reducing your car loan payment.

You may be able to refinance, or you may want to trade your current vehicle in for something less expensive. You can also shop around to find cheaper car insurance, since those are the two biggest expenses in owning a car.

When shopping for a new vehicle, look for models that hold their value longer and those that are more efficient to help lower your costs as well. Models that have a reputation of not needing a lot of repairs will also have a lower cost of ownership.

The next time you start thinking about buying a vehicle, look past the sticker price. Don’t focus just on the monthly payments. Consider the entire cost of owning that car. Know what you can truly afford in a vehicle before you buy.