Sticker Price is half the story

Subheading: The real cost of a car is in ownership.

Let’s face it, buying a car is one of the worst investments with a large chunk of cash you can make.  Despite this, the vast majority of people have to use credit to buy cars.  Even more bizarrely, banks currently clamour over each other to secure low rate, long term car loans.  Apparently the debt on an item with guaranteed depreciation is a hot financial commodity right now.

I’ll never get big finance.

As such, figuring out where to put this kind of money is a tricky, time consuming thing.  Most people spend some time researching their options before buying; even still, most don’t spend enough.  The allure of 0% financing or deep cash discounts often make a car tempting.  Whether buying new or used, nothing proves how important over-researching your top choices more than cost of ownership.  Cost of ownership is a term used to determine how much your car will cost you annually to keep on the road.  This is the true cost of your vehicle and all things are not equal.  Cost of ownership is a very difficult thing to measure.  Car reviews, particularly new ones, rarely, if ever, take into account the cost of ownership.  Consumers reports do try, but their system costs money to see the results of, and said results don’t always fully capture the real picture.  Cost of ownership is like a hidden fee that keeps on giving once you’ve put down a massive chunk of cash.

Cost of ownership is an important consideration particularly if you’re buying a vehicle for long term.  Where your initial purchase price may be low on a “cheaper” car, that vehicle may wind up costing double over 7-10 years in various cost of living expenses.  Suddenly a vehicle that typically sells for $3,000-$5,000 more is actually the same price.  Or cheaper.  Buying a car is a major investment of money, so it only stands to reason you’d want to put that money into something that will bleed it out the slowest.

While researching your next car, new or used, consider these elements to help you get a feel for how much this car will really cost you.

Repair trips outside of regular maintenance

In some cases, the cost of ownership can easily balloon to the purchase price of the car, and beyond.  I know this from personal experience.  My first car, a 2000 Chrysler 300M, wound up costing me nearly 200% of the purchase price by the time I sold it.  Our current van, a 2005 Ford Freestar, recently crested its original $6000 purchase cost in the 5 years we’ve owned it.  Sure, neither car was inspected before purchase – which would have saved us a lot of lemon – the hard truth is that some cars simply cost more to run than others.  Use tools online to determine how often, and how expensively, past years of your shortlisted car have been to the shop.  A website like truedelta.com is an excellent starting point, tracking user submitted repair jobs right down to their maintenance costs.  It even gives you estimated odds of getting a lemon when buying a particular car.  Compare your car to other cars in its segment.

Unexpected repairs can be the biggest X factor in car ownership, and the one most out of your control.  There is an old adage when buying things, “you get what you pay for,” and your research of repair trips online will certainly validate that.  Time and time again my research into vehicles has proven that spending the extra money to get into brands known for reliability pays off over time.  Case in point: my father owns a 2005 Toyota Sienna, a direct competitor to my Freestar, which he has owned since new (we bought ours used in 2010).  He has only seen one repair trip for his van outside of regular maintenance in 10 years to my 3-4 times annually.  Money spent on the outset could be money saved over ownership.

Depreciation

Cost of living is a combination of a whole variety of factors.  Unexpected repairs are only a piece of the pie.  Depreciation, hitting new cars worse than used, is a factor as well.  Some new vehicles have lost nearly 50% of their value after a mere year or two of ownership.  Others depreciate at such a slow rate you barely take a hit on resell.  Depreciation is a much easier thing to measure.  When considering a new car, or a used one, take a look online what 2-3 year used versions of the same model are selling for.  In some cases you’ll find the used prices are cheaper still than the heavily discounted new cars; and that’s not a good thing.  Consider the reputation of the brand you’re buying.  Also consider how prolific they are in the rental market.  Second hand rentals kill the resale value of a new car, because of how much they drive down the price.  Note; this isn’t because buying a rental is bad, it’s because manufacturers often give rental fleets huge discounts to buy their products.  When rental companies sell off their fleets at the end of a year or two, they sell them a 45-50% of their MSRP, making it difficult for others to sell them for much more.

Fuel costs

Another consideration in the cost of ownership is fuel type and mileage.  We all know there are various types of gasoline available at the pumps, but most of us only use one kind; the cheapest.  Truth is, many cars don’t just use regular, in fact manufacturers recommend premium.  While most of the cars under consideration may not be effected by this, it’s worth keeping an eye out for.  Also consider the overall mileage numbers for your car versus its competitors.  New car window stickers even include a handy estimated annual fuel cost, use this number.  A few hundred dollars in gas savings adds up quickly over the years.

Diesel, as much as I love it, is also much more expensive.  Diesel does give you better mileage numbers than gasoline, but those savings may be offset by the extra cost per liter you have at the pump.

Cost of maintenance

This is a harder one to gauge, and ties into my first point somewhat.  All cars need maintenance, both required and unexpected, and not all cars are built the same.  As such, certain cars will cost more for the same work.  Consider the oil type recommended by the manufacturer.  Get online to ownership forums and see how much parts cost for the car.  What does a set of pads or rotors cost?  How common is the tire size?  Is it a timing belt or chain?  What maintenance points are recommended by the manufacturer, and how often?  All of these questions have different answers for different makes.  Vehicles with higher availability or sales volumes might have cheaper parts because of availability.  This consideration should be made in tandem with unexpected repair trips.  A vehicle with very few, but very expensive, unexpected trips may, in the long term, be the same or more expensive than a less reliable vehicle with frequent, inexpensive repairs.

Loan interest

Not everybody will agree that this is an element in cost of ownership, but it’s a real expense associated with buying a car.  Cash discounts often do little to offset the interest you’ll pay on a loan.  Car loan interest is money you’re spending which is above and beyond the price of the car.  Hopefully your down payment is a larger percentage of the vehicle’s purchase cost than loan interest.  If not, you’re starting things immediately upside down.  Loan interest rates are much lower than ever before, which is partly what’s driving up their popularity.  Even used car loans come in at less than 5%.  However, the monthly cost you see often hides how much your loan is actually costing you.  Many manufacturers like to flaunt a low bi-weekly payment in advertising.  When you look close, that payment is often over 84 or even 96 months – a time frame over which most people will have sold/junked their car by.  Since interest is calculated over the term of the loan, the longer the loan, the higher the cost of the loan.  Consider the interest rate a permanent cost increase to your vehicle.  Definitely worth taking into consideration when looking at other factors like depreciation.  Cash discounts can dissolve fast once loan interest and 2 year depreciation are factored in.

Moral of the story is simple: research your car before you buy it, new or used.  Any decision on this made in less than 72 hours is one made to quickly.  Even once you’ve picked the car you want, get online and see how it stacks up.  See how its depreciation goes, check recalls, safety information, and always, always negotiate the purchase price.

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