The Cost of Owning a Car

There are many of costs associated with owning a car, including:

  • Depreciation
  • Loan Interest (or Opportunity Cost)
  • Taxes
  • Fees
  • Fuel
  • Maintenance
  • Repairs

Analyzing each of these costs, we get the following 15-year costs of owning different types of cars:



Bottom Line:

  • To save money on your car purchase, try to purchase a smaller, more inexpensive car.
    • Smaller cars will cost less at initial purchase, have better fuel efficiency, cost less to insure, and cost less to maintain.
  • You can also buy a used car to save money, but we found that after the initial year of depreciation, the cost of owning a car is roughly the same from years 2 through 15.
    • This is due to older cars costing a lot to maintain, which can make them expensive to own in their later years. You may spend between $1,000-$1,500 each year to maintain and repair older cars, whereas newer cars have almost no repair costs.

Depreciation

The depreciation curve for an average car is shown below:

Notes:

  • Cars experience the largest amount of depreciation in the first and second years.
    • The largest depreciation drop occurs when you drive a new car off the dealership’s lot.
  • The rate of depreciation is similar from years 3 to 10.
  • Depreciation begins to slow down after year 10.
  • Our depreciation curve assumes an annual mileage of 15,000.
    • Cars depreciate faster if they are driven more miles each year
    • Cars depreciate slower if they are driven less miles per year.
  • Depreciation curves are different for each car
    • Sports cars generally depreciate faster than family cars because it is assumed that sports cars are driven harder
    • The make and model has an effect on each car’s depreciation as well
      • Car manufacturers that are known to build reliable cars, such as Honda, build cars that depreciate less over the years.  This is because people assume you have to spend less on repairs on their used cars.  Therefore, they keep their value better.

The annual car depreciation for our example cars is shown below:

Taxes & Fees

Taxes and fees include the cost of sales tax when you purchase a car and annual vehicle registration fees.  These costs can vary by state.  The average taxes and registration fees in the U.S. are shown below.

Notes:

  • The costs shown in the chart assume that taxes are paid on a new car purchase.  However even if you buy a used car, you will still have to pay sales tax.  However, the sales tax will be on a lesser amount.

Opportunity Cost

When you purchase a car, you either take out a loan to pay for the car, or pay for the vehicle upfront with cash:

  • If you buy a car using a loan from a bank, you are paying interest on the bank loan each year at an interest rate determined by the bank and directly are paying the “opportunity cost” to the bank in the form of interest payments.
  • If you buy a car with cash, you are foregoing interest on your own money because it’s tied up in the equity of the car.  There is no exchange of interest payments in this scenario, but you are still losing out on investment returns, and therefore you incur an opportunity cost by purchasing a car with cash.
    • Either way, the math works out the same.  You are either paying interest to a bank, or losing out on interest on your own money.  The opportunity costs for our three example vehicles are shown below:

Fuel

For our analysis, we assumed an annual mileage of 15,000 and a cost per gallon of $2.25.  However, gas prices can dramatically go up and down from year-to-year.  Therefore your fuel expenses may double in one year unexpectedly.

Insurance

For our analysis, we assumed that full coverage insurance was purchased for each year of ownership.  However, many people drop comprehensive or collision insurance coverages on older cars, so you may be able to save money on the later years of car ownership.  See our separate article on How To Save Money on Insurance for tips on reducing your insurance bill.

Maintenance & Repairs

We based our maintenance & repair costs based on data from YourMechanic.com.

Notes:

  • Most cars will have little repair and maintenance costs in the early years
  • In older years, repair and maintenance costs start to be the biggest expense associated with the car
    • Buying a used car might save you money upfront, but it can cost you if you own a car that needs a lot of maintenance
    • Conversely, if you can find a used car that is reliable without much maintenance, you can save a lot of money



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