The total cost of ownership is an assessment of all costs related to owning and using a car throughout its life. This includes the initial purchase price, costs of financing, insurance expenses, day-to-day operating costs, the impact of depreciation, and other fees, including registration and parking. Understanding the total cost of ownership is crucial for making well-informed decisions when buying a car, planning a budget for a vehicle purchase, and selecting a car that aligns with your long-term financial objectives.
What is Total Cost of Ownership
Determining the full cost of a car you own, or one you might buy, gives you a clearer idea of your auto budget. Many factors add to a car's cost, so it can be hard to know exactly how much your car is costing you.
Total cost of ownership for a car is a comprehensive assessment of all expenses related to owning and operating a vehicle over its lifespan. By calculating this, car buyers can make more informed decisions, comparing different vehicles, not just on their upfront costs, but also on their long-term financial impact.
It can also help in budgeting for a car purchase and in selecting a vehicle that aligns with one's long-term financial goals. This calculation is particularly important for those considering traditional fuel, hybrid, or electric vehicles, as the cost dynamics can vary significantly.
Calculating the Average Monthly Cost for a Car
By using a monthly car cost calculator, you can input your specific expenses and get a clear breakdown of what your car is costing you. All you have to do is consider adding the following car expenses:
Initial Purchase Price: This is the starting point of the total cost of ownership and includes the sticker price of the vehicle plus any taxes, fees, and optional features added at the time of purchase.
Financing Costs: If the car is financed, interest on the loan becomes a part of the total cost of ownership. The total interest paid over the life of the loan depends on the interest rate, loan term, and principal amount.
Insurance Costs: Full coverage can vary depending on location, vehicle type, driving history, and your insurance policy.
Operating Costs: It's important to consider how much you spend, or will be spending on fuel. The average cost of fuel depends on the type of your vehicle, its fuel efficiency, the type of fuel it uses, and fluctuating fuel prices. For plug-in hybrids and BEVs, it's important to consider electricity costs or the price of charging the vehicle, which can vary based on local electricity rates and the vehicle's efficiency in converting electricity into drivable miles.
Maintenance Costs: Consider ongoing car maintenance such as oil changes, tire rotations, brake pad replacements, and unforeseen repair costs. Some cars are more expensive to maintain than others. Importantly, check what maintenance plans come with the vehicle or can be added at the time of purchase.
Depreciation: Cars typically lose value over time, which is known as depreciation. Depreciation is the gap between the car's purchase price and its value at the time of sale or trade-in. The rate of depreciation varies depending on the make and model of the vehicle, its market demand, mileage, and age. To accurately gauge how well your car has maintained its value, it's advisable to get an up-to-date valuation.
Registration, Fees, Taxes, and Miscellaneous Costs: Simply divide your yearly vehicle registration renewal fee by 12 to find the monthly cost. Then, include any other regular expenses, like parking fees.