What the Heck is the “True Cost of Ownership” of a Used Car (And Why Does it Matter?)

You’ve probably heard it before. Budgeting is all about making sure you can afford what you have to pay for, well into the future, right? When you’re making a budget to buy a used car, you not only have to consider the up front cost of it, but what it takes to maintain it, license it, power it, and generally keep it going into the future. Making a big purchase like a house or a car, is never a one-and-done payment. You’ll have bills that come in monthly that will need to be covered. When you’re thinking about buying a new-to-you car you may not think to consider these costs, when in reality, the price tag on the window is just the tip of the automotive ownership iceberg.

Your reasoning will likely go something like this: “It’s a used car so it won’t need as much maintenance and I wont take any depreciation hit. Because it won’t need as much maintenance, and someone else ate the big depreciation when they drove it off the lot the first time, I won’t need to budget as much per month, as say I would if I decided to buy a new car.” Sounds like solid reasoning doesn’t it? That’s where you might need to take a step back and reconsider.

Meet the true cost of ownership.

The true cost of ownership is essentially taxes, fees, gas, maintenance, depreciation costs, and insurance all rolled into one monthly number. This number is what it will cost you, above and beyond your monthly payment on the car, to maintain and run it. In some cases, as Consumer Reports points out, it can make sense to pay more for a car initially, and take on less in the long run. In others it doesn’t make sense to pay a premium for a used car, because it’s going to cost you as much or more to maintain it. While it sounds complex, it’s really just a matter of a few simple calculations to figure out what the true cost of ownership of a new-to-you car may be.

First, know your loan and consider the depreciation. You’ve done the research, found the right bank, been pre-approved for a loan and have made a deal with the seller. Great job—but your work isn’t done yet. You have to consider depreciation. Cars, in general, depreciate at a rate of 15-20% per year for the first five years. The more expensive the car coming off the lot, the more depreciation it will take. So say you are getting a 2013 Honda CR-V. It’s roughly $25,000 coming off a dealer’s lot. That means in the first year you could lose anywhere from $3750 to $5000 to depreciation. The next year you’d lose anywhere from $3187.50 to $4000 in depreciation. This will continue on into the future until the asset depreciates to zero. Want to do it yourself? Check out this car depreciation calculator over at money-zine.

Along with depreciation you need to consider what kind of taxes and fees you’ll need to pay on your car each year you own it. Taxes and fees differ from state to state but you can check out a list of those prices over here at the National Conference of State Legislatures where they have a list of the states and their fees.

Repair costs also play a major role in calculating the true cost of owning a used car. Some cars – like say, a Porsche 911 or a BMW, cost a lot to repair. Both parts and labor for these cars can be very expensive. The cost say, of repairing a Honda or a Toyota for example, is far less. While it's nearly impossible to know how much a car may cost you to repair, you can check out reliability scores on sites like J.D. Power and Consumer Reports and know how often you might be shelling out the dough (though there are a few things to consider about those studies themselves—make sure you take them with a grain of salt). There are also ways you can considerably reduce the cost of repairs. Consider too, whether you have a warranty that covers your car as this can and does cut down on repair prices. Some companies like Hyundai and Kia offer 100,000, five-year warranties that can significantly offset the price of repairs. If you want to do the legwork yourself, head over to Cars.com where they have a “Fair Price Estimator,” for car repair costs.

Insurance costs can kill. If you’ve ever shopped for insurance you know how difficult it is to find a great price. One vehicle may cost you $900 for six-months at one place, while the same policy--for the same car--may cost as much as $2,000 at another. It’s part of the kabuki of insurance that makes it so difficult to suss out. Factors that go into the price of insuring a car include everything from the age of the vehicle to the amount of coverage you want, to your driving habits and traffic violation history. Your age and the distance you drive daily as well as your credit score also play major roles in the price you are quoted. Any one of these factors can cause the price of the true cost of ownership to increase (or decrease) significantly. Want to know what you might pay to insure the used car of your dreams? Check out Insure.com where they have a list of the most and least expensive vehicles to insure.

Fuel prices can wreak havoc. Just a few years ago gas prices were as high as $5 a gallon in some parts of the country. Now they are hovering right around $2 a gallon all over the country. That $3 difference in price can greatly affect the affordability of a car when factored into the cost over ownership over time. If you are like most people and drive anywhere from 12,000 to 15,000 miles per year, that’s money that you have to budget to cover the cost of keeping your car on the road. Want to get a good idea of what the cost could be? Head over to the Energy Information Administration where they put out a yearly outlook for fuel prices across the country.

All of these factors will impact what the actual monthly, out of pocket, cost will be when you buy a new-to-you car and all of them need to be considered. There are a few great online calculators that can help you put all of this into on final number. Check them out at KBB and Edmunds and see what that new-to-you car might actually cost.