Most Americans own cars. In fact, a Pew survey found that 88% of Americans owned cars, which is the second-highest ownership rate of any country (Italy came in higher at 89%). This 88% ownership rate was far above the median national share of vehicle owners in Europe, where just 79 percent of people own cars.
Owning a car is not just a convenience; in many parts of the U.S., it’s necessary to get around in areas with limited access to public transportation. While car ownership may be a customary expense that almost everyone has to budget for, this doesn’t mean owning a car is affordable. In fact, vehicle ownership can be downright expensive.
The cost of owning a car starts with the sticker price of the vehicle you buy, but the upfront expense of purchasing a new or used car is just one small part of the expenses.
You also have many ongoing expenses you need to budget for, including car insurance, gas, oil changes, basic maintenance costs and essential repairs. All of these expenses can add up to thousands of dollars annually, which means you’ll be paying for your car even after you’ve paid off the initial purchase price.
To make sure you’re prepared to shoulder the cost of car ownership, review all the expenses you’ll be responsible for.
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The Upfront Costs of Owning a Car
The cost that most people focus on when it comes to car ownership is the purchase price of the vehicle. And this cost has been rising, according to Experian’s report on State of the Automotive Finance Market for the second quarter of 2018.
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1. Car Costs Are Rising
Buyers of new cars borrowed an average of $30,958 in 2018, which was around $724 more than the prior year, according to Experian. Buyers of used vehicles, on the other hand, borrowed an average of $19,708, which was $520 more than the year prior.
With loan amounts rising, it shouldn’t come as a surprise that the average monthly payment for used and new vehicles also rose. The average monthly payment for a new vehicle hit $525 monthly in the second quarter of 2018, which is an all-time high, and which is $20 more per month than the prior year. And the average monthly payment on loans for used cars also hit a new record of $378, which is $13 more than in 2017.
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2. Interest Rates
The vast majority of car buyers do finance their vehicles, with 86.1% of new car buyers and 54.7 percent of used car buyers taking out auto loans. This means that most people pay not only for the cost of their cars but also for the interest on their auto loan.
Interest charges add to the total expenses associated with a vehicle purchase — especially since borrowers have been trending towards taking out longer loans, which means paying more interest for a much longer period.
The most popular auto loan length for new car buyers was 61 months to 72 months in 2018, but almost one-third of borrowers took out loans that give them 73 to 84 months to pay off their new vehicle.
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3. Down Payments
Car buyers also need to pay a down payment to purchase a vehicle — even if they take out a car loan — and they will also need to pay auto insurance premiums up front since you can’t drive a car off the lot without insurance.
Autotrader indicates that used car buyers typically should put down 10 percent of the vehicle’s sale price, which could mean coming up with several thousand dollars before even starting to make your monthly loan payments.
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The Costs of a Car Over Time
Your ownership costs don’t end with paying the purchase price — plus interest — for the car you’ve bought. You also have ongoing annual costs to account for.
These expenses include:
- Taxes & license and registration fees
- Gas costs
- Oil changes
- Routine maintenance, including new tires, brakes, and windshield wipers
- Repair costs
- Auto insurance
- Vehicle parking, depending on where you live
- Depreciation costs (the reduction in the value of your vehicle as it gets older and you put more miles on it)
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Breaking Down the Costs
These costs can vary based on where you live, the number of miles you drive, and the kind of vehicle you own. AAA provides a helpful guide called Your Driving Costs, which can help you to estimate how much these annual costs will be. For example, AAA estimates that in 2018:
- Fuel, maintenance, repairs and tires would run around 15.26 cents per mile driven on a small sedan; 17.76 cents for a medium sedan; 20.99 cents per mile for a large sedan; 17.57 cents per mile for a small SUV; 21.09 cents for a medium SUV; and 20.10 cents per mile for a minivan.
- Full coverage insurance could run around $1,315 for a small sedan; $1,232 for a medium sedan; $1,209 for a large sedan; $1,074 for a small SUV; $1,102 for a medium SUV; and $1,114 for a minivan.
- License, registration feesand taxes would be around $466 for a small sedan; $690 for a medium sedan; $783 for a large sedan; $614 for a small SUV; $845 for a medium SUV; and $769 for a minivan.
- Deprecation would be an estimated $2,268 for a small sedan; $3,580 for a medium sedan; $3,893 for a large sedan; $2,972 for a small SUV; $3,714 for a medium SUV; and $4,003 for a minivan.
- Finance charges would be around $439 for a small sedan; $700 for a medium sedan; $770 for a large sedan; $618 for a small SUV; $872 for a median SUV; and $776 for a minivan.
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Projecting Long-Term Costs
With all of these different expenses, if you drive 15,000 miles annually, you’d pay around $6,777 for a small sedan each year; $8,866 for a medium sedan; $9,804 for a large sedan; $7,869 for a small SUV; $9,697 for a medium SUV; and $9,677 for a minivan.
In many cases, it is helpful to project car ownership costs over five years of ownership and to budget for these expenses accordingly. For example, you don’t have to get new tires every year, but when you do need them, you’ll pay several hundred dollars with the specific price depending upon your vehicle and the tire quality.
If you save a small amount each month towards car repairs and maintenance, you won’t have to come up with this money all at once when your car needs maintenance.
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Other Factors to Consider
As you can see, the total cost of ownership can be quite high. The good news is, if you are the owner of a vehicle, you may be able to recoup some of your expenses when you sell the car. The amount you can sell the vehicle for will depend upon its condition at the time of sale, so you should take good care of your car to try to preserve its value.
You can also consider shopping for vehicles that tend to hold their value well and get a good price on the resale market. Research the typical resale value of used cars on Kelley Blue Book or Edmunds to get an idea of how much you’ll recoup when you sell your vehicle.
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Having a vehicle warranty can also affect the costs of ownership, as warranties will cover some of the most costly repairs your car may need. The fact that new cars come with warranties, while used vehicles may not always have any guarantees, means that you can’t always just compare purchase price when deciding if a used car is the best deal.
A used car with no warranty may appear cheaper, but it could have hidden costs down the line if you end up having to spend money to keep it running.
You can also consider leasing a new vehicle if you want to have a new car at a lower cost, but you should be aware that leasing is often a bad financial choice in the long run because you can’t keep the car at the end of the lease unless you buy out the lease.
It usually makes more financial sense to buy a reliable used car or an inexpensive but reliable new vehicle, and drive the car as long as possible so you don’t get stuck with a car payment for life.
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Consider the Full Costs of Car Ownership
Buying a car is a major financial commitment. In addition to the down payment and upfront costs, you’ll be paying thousands of dollars in maintenance, insurance, and fuel costs to keep that car running for as long as you have it.
Make sure you understand all of the expenses associated with new and used vehicles before you make your decision. Ensure you have room in your budget to cover all those vehicle costs.
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