How-to: Manage Cost Of Ownership For Your Vehicle

Buying a car is not a simple money decision. Actually, buying a car in today’s economic climate may be your riskiest decision ever. However, it doesn’t mean you’re stuck with your beat-up car, with the sound of the engine competing with the sound of your cassette player (yes, cassette player. This alone is a sign you should switch!).

However, the biggest beef most people have with getting a brand new car is the steep rate of depreciation which takes up a huge chunk of your cost of vehicle ownership. Stopping depreciation is as possible as stopping the Earth from orbiting around the Sun – yes, it’s pretty impossible. But you can manage different aspects of owning a car to bring down the cost of ownership.

The key to getting the best value for your money when you are buying a brand new car is to know how to manage your cost of ownership. Managing cost of ownership starts before you even test drive your dream car.

Here’s how you can bring down the cost of ownership for your brand new car – in every aspect!

1. Financing

Most people in Malaysia buy a car by taking up a hire purchase loan, and that will take you about five to nine years to pay off. The hire purchase loan amount is typically 90% of your car price, and the remaining 10% will be paid upfront by you.

There are three things you can do to bring down the cost in this area: pay higher down payment, take the lowest loan tenure, and/or get a loan with a low interest rate.

Here’s how each of the above make a difference in your cost:

Standard financing A

Higher down payment

B

Lower interest rate

C

Shorter tenure

A, B and C Car price: RM88,000 Car price: RM88,000 Car price: RM88,000 Car price: RM88,000 Car price: RM88,000 Down payment: 10% Down payment: 20% Down payment: 10% Down payment: 10% Down payment: 20% Loan amount: RM80,000 Loan amount: RM70,400 Loan amount: RM80,000 Loan amount: RM80,000 Loan amount: RM70,400 Interest rate: 2.63% Interest rate: 2.63% Interest rate: 2.49% Interest rate: 2.63% Interest rate: 2.49% Loan tenure: 9 years Loan tenure: 9 years Loan tenure: 9 years Loan tenure: 5 years Loan tenure: 5 years Monthly repayment: RM916 Monthly repayment: RM806 Monthly repayment: RM907 Monthly repayment: RM1,509 Monthly repayment: RM1,319 Total interest: RM18,936 Total interest: RM16,664 Total interest: RM17,928 Total interest: RM10,520 Total interest: RM8,765 TOTAL SAVINGS RM2,272 RM1,008 RM8,416 RM10,161

Compare car loans from different banks and see how much it’ll cost.

2. Depreciation

Depreciation is the highest costs in owning a car. Your vehicle begins to depreciate in value the moment you receive the keys from the car dealer.

However, there is a way to manage your vehicle depreciation, and it is extremely important to do it as it will help you determine which car to buy.

In this example, Car A depreciates 53% in the first four years. The lower the depreciation rate, the better. Do the same calculation for a few different models, and find one that has a lower depreciation rate.

Try to keep your vehicle in mint condition, and for the long-term, as the depreciation rate is always higher in the initial years of ownership. A good rule of thumb is to assume that a new car will lose approximately 20% of its value in the first year and 15% each year after that until, after 10 years, it’s worth around 10% of what it originally cost.

3. Petrol consumption

Unsurprisingly, petrol takes up a huge chunk of your cost of car ownership, especially for urban dwellers. The often-lamented traffic congestion plays a huge part in making our vehicle a petrol-guzzling monster.

Other than the usual tips and tricks to keep petrol consumption low, like frequently service your car and not idling, we can take more proactive steps in our petrol consumption.

Choosing a car with good rated economy may be able to help you lower this cost. Here’s an example of how you can estimate the fuel cost of a Volkswagen Jetta car:

Urban

Extra urban

Average

Published fuel consumption 7.5l/100 km 5.2l/100 km 6l/100 km Average mileage per month 1,000 km 1,000 km 1,000 km Total number of litre used in a month = (Average mileage per month ÷ 100km) x 7.5 litre

= (1,000km ÷ 100km) x 7.5 litre

= 75 litre = (Average mileage per month ÷ 100km) x 5.2 litre

= (1,000km ÷ 100km) x 5.2 litre

= 52 litre = (Average mileage per month ÷ 100km) x 6 litre

= (1,000km ÷ 100km) x 6 litre

= 60 litre Estimated fuel cost per month = Petrol price per litre x Total number of litre

= RM1.85* x 75 litre

= RM138.75 = Petrol price per litre x Total number of litre

= RM1.85* x 75 litre

= RM96.20 = Petrol price per litre x Total number of litre

= RM1.85* x 60 litre

= RM111.00

* Price of RON95 in January 2016.

Numbers don’t lie, but another way of keeping fuel cost low is to drive a car with a small engine. The Volkswagen Jetta’s 1.4 TSI engine is capable in delivering 160PS, which matches the fuel efficiency of a typical 1.5-litre Japanese B-segment sedan but with much better performance.

Even with a good rated economy car, you can still shave some of that petrol expenses down with a good petrol credit card.

4. Maintenance and repair

When buying a new car, don’t just look at the price tag. Think about how much it will cost in the long run, too. And the key to keeping vehicles running well, and repair cost low is by conducting routine maintenance.

The general rule of thumb is to allocate 1% of your car value every year for maintenance purpose, and to have an emergency fund of 10% of your car value for unexpected servicing cost. To keep your repair cost low, especially for major problems like through-corrosion, choose a brand that provides at least 5-year warranty period.

Volkswagen is one of the leading brands that offers 5-year warranty with unlimited mileage, so you don’t have to worry about paying an arm and a leg for any manufacturing defects within the period.

Another point to consider when keeping your maintenance and running cost low is the type of engine your car uses. Volkswagen models also offer the added benefit of 15,000km service intervals, which results in savings of between 5% and 10% in terms of cost of ownership compared to other brands.

5. Road tax and insurance

Road tax and insurance are mandatory costs for a Malaysian driver that one can’t escape from. Road tax rate depends on your engine capacity, the higher the capacity, the more expensive it is.

You don’t have to pay hefty road tax every year just to drive a high-power vehicle. Due to advanced combustion technology, Volkswagen are able to keep their superior performance with smaller capacity engines. Volkswagen models, such as Polo and Jetta, utilise 1.2 and 1.4 TSI engines, and they only incur a road tax of RM55 and RM75 a year respectively.

Engine capacity (cc) Road tax

1,000 and below RM20.00 1,001 to 1,200 RM55.00 1,201 to 1,400 RM70.00 1,401 to 1,600 RM90.00 1,601 to 1,800 RM200.40 – RM280.00 1,801 to 2,000 RM280.50 – RM380.00 2,001 to 2,500 RM381.00 – RM880.00 2,501 to 3,000 RM882.50 – RM2,130.00 3,001 and above RM2,134.50 and above

Malaysia Road Tax Structure for Private Vehicles

On the other hand, insurance premium depends on your sum assured, which depends on the market value of your car. The premium typically reduces over the years, as the value of the car depreciates.

Avoid driving reckless to keep your No Claim Discount (NCD) on your auto insurance. The more road accidents an individual has, the higher his or her car insurance will be. If you are a careful driver and have never had an accident in your current car, you are entitled for an NCD, which can be as high as 55% off your policy price. It pays to drive safe.

Buying a car is not as simple as just comparing prices and having a nice stereo. To ensure your vehicle is a smart financial decision, consider all aspects of owning a car and you will see a much lower cost of vehicle ownership.

Image from Carmudi Philippines