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For most people, buying a vehicle is their highest expense next to purchasing a home. As such, it’s important that you purchase a vehicle that is not only affordable now, but will continue to fit your car budget long into the future. To determine the true cost of car ownership, you’ll need to not only know the vehicle purchase price, but also the car financing, fuel, insurance, taxes, depreciation, and maintenance per mile and per year.

Car Purchase Price

To start, you’ll need the cost of purchasing the car. For this example, just include the principal on any car loans you may take out. We’ll cover financing in the driving costs section.

According to the State of the Automotive Finance Market for Q1 2019 by Experian, on average, car loans are $32,187 for new cars and $20,137 for used cars. The loan length is 68.86 for new cars and 64.67 for used cars. Finally, the average monthly payment is $554 for new cars and $391 for used cars.

Average Vehicle Loan Amount by Risk Tier

Risk Tiers New Used Deep Subprime $26,556 $15,457 Subprime $29,326 $16,996 Nonprime $33,572 $19,803 Prime $34,061 $21,795 Super Prime $29,620 $21,407 Total Average $32,187 $20,137

Average Vehicle Loan Term by Risk Tier (in Months)

Risk Tiers New Used Lease (Avg New) Deep Subprime 72.31 59.71 37.57 Subprime 72.83 62.45 37.38 Nonprime 73.11 65.66 37.36 Prime 70.19 66.29 36.93 Super Prime 62.96 62.44 35.92 Total 68.86 64.67 36.72

Average Monthly Payment by Risk Tier

Risk Tiers New Used Lease (Avg New) Deep Subprime $546 $410 $495 Subprime $564 $406 $474 Nonprime $574 $392 $464 Prime $563 $384 $456 Super Prime $528 $386 $452 Total $554 $391 $457

Calculating Car Driving Costs

Car driving costs include fuel prices, maintenance/repair costs, insurance rates, license/registration/taxes, depreciation, and financing. Please see below a quick breakdown of how much the average cost is annually for each new vehicle category (assuming 15,000 miles per year), according to the American Automobile Association’s (AAA) Your Driving Costs page. In addition, there is also a table listing the composite average cost per mile breakdown.

New Vehicle Category Annual Cost Small Sedan $7,114 Hybrid $7,736 Electric $8,320 Small SUV $8,394 Medium Sedan $8,643 Medium SUV $10,265 Large Sedan $10,403 Pickup $10,839

The True Cost of Car Ownership

To calculate the true cost of car ownership, you can use the numbers above to create an estimate for car ownership over the life of the vehicle. To do this, you’ll first estimate how long you plan on owning the car. This could be in mileage (i.e. 200,000 miles) or years (10 years). Next, you’ll multiply this estimate times the relevant driving cost and add this to the purchase price.

For example, let’s say you anticipate owning a small sedan for 10 years and the car purchase price is $25,000. To determine the true cost of car ownership, you’ll multiple the 10 years times the $7,114 for a small sedan and add in the $25,000. This equates to $96,140.

In addition to AAA’s figures above, there are also other resources you can use like Edmunds’ Cost of Car Ownership Tool or Kelley Blue Book’s 5 Year Cost to Own Tool.

Car Buying Tips

A few things to keep in mind when you purchase a new or used car:

Know how much car you can afford ahead of time. If you don’t have the money for a down payment or money each month in your budget, it’s probably better to either wait or buy something more affordable.

Minimize finance costs by improving your credit score and obtaining the shortest loan term you can afford.

If you can wait, the end of the year is a good time for buying vehicles as dealers are trying to meet their yearly goals. You may also be able to find deals between July and October as they’ll be clearing out old inventory to make way for the new model year.

Vehicles depreciate rapidly within their first 2-3 years. Look for a lightly used model that’s ~3 years old to get the best deal.

Try to limit the percentage of your take home pay you spend on car expenses. As a general rule of thumb, don’t spend more than 20% of your take home pay on all of your vehicle expenses each month.

The True Cost of Car Ownership – Conclusion

Although you won’t know the actual true cost of car ownership upfront, it’s still important to estimate it. By estimating the true cost of car ownership, it allows you to see the whole picture as it relates to your car expenses each month and better anticipate your car expenses moving forward. This allows you to make more informed buying decisions.

Do you take into account the true cost of car ownership when you are looking at buying a car?

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