How to calculate the true cost of car ownership

The most important element to understand when buying a car is the cost associated with it besides the actual price of a car.

This includes finance fees, taxes, MOTs which may be obvious to most. What isn't as obvious is the weekly/monthly true cost of a car including fuel costs, consumables, depreciation etc.

In essence, what do you actually pay for the privilege of having a car?

When we buy a brand new car, it is advertised at a Manufacturer Suggested Retail Price (MSRP). Car depreciation is always calculated and stated as a percentage of its original MSRP.

Fortunately, online car brokers can help match dealerships offering discounts with buyers. The discounts vary widely but can at times reduce the price by a factor of upto one-year's worth of its depreciation in value. You must NEVER pay the MSRP for a new car, always expect a discount or walk away.

As soon as a car is bought, its life begins. With life, things deteriorate and its value fluctuates.

Some markets see a rise in car prices (called appreciation) due to heavy inflation in its currency value. These countries also see a rise in new car MSRPs.

In the UK, a car loses its value during its usable life until it amounts to its scrap value only. This is usually between 15-20 years for a well-kept reliable car, though associated with substantial maintenance costs.

Used cars are where dealers make money. Financing a used car also commands a higher interest rate. Before buying a used car, make sure to search online and learn about the particular car model and spec you are after. NEVER buy a car on a whim without necessary research, or you will pay for it in time, money and psychological turmoil.

Manufacturers claim a guaranteed life for each car they sell. This reflects in the period of warranty coverage offered by each manufacturer. Anything beyond, if not covered by consumer rights, is bonus period.

This rule does not apply to classic cars, which paradoxically appreciate in value past a certain age. The round-about figure is usually 25 years for rebuilt cars and 40 years for original specification cars. They become road tax and MOT exempt. Check out DVLA guidance here and here

Cars are consumables

Now that you've bought a car, it will lose its value. The initial loss in value suffers a somewhat sharp decline as depreciation is by way of percentages in the trade.

How much your car is worth and what depreciation it suffers is based on its trade market value. Brands with a strong reputation for reliability or desirability will retain its value more.

The process is quite arbitrary and complex but in essence the method to madness is determined by arbitrary statistical formulas used by insurance companies when paying out for damaged vehicles of certain make, age and mileage.

These calculators are available to the public.

Fortunately, new cars are nearly never sold for MSRP

With higher mileage and older age, a car's depreciation plateaus and a new expense rears its ugly head; major service maintenance costs. Normal wear of moving parts in the car leads to issues with function. These require replacements which not only command a significantly high premium but also require a deeper tinkering of the car's innards.

Unfortunately, newer cars are less servicable by design. Hence a dealership will opt to replace whole segments of a car to resolve a minor issue at a huge expense. When third-party garages attempt to repair these issues, secondary issues arise which primarily manifest as electrical or computer errors in recent cars. These are notoriously difficult to correct.

Furthermore, as the owner is forced to use third-party workshops to limit costs, it leads to a further drop in desirability of the car in the second-hand trade. A factor highly valued in the arbitrary pricing of used cars are the number of dealership service stamps on the car's maintenance logbook. This, some might argue, is due to the standard of service and regimental checklists followed by a manufacturer's approved workshop.

So what is the actual cost of car ownership

Here is a simple formula to better understand how much money will leave your bank account per year, per month and per week if you own a car.

1 - Initial upfront cost of buying a car - which includes finance fees, mostly recouped by selling the car.

2- Cost of insurance - Depends on your personal circumstances (Yearly)

3- Cost of depreciation - Refer to depreciation calculators like this one. (Yearly and mileage based)

4- Cost of Road tax - by Fuel type and gm/km. Click here for more information.(Yearly)

5- Cost of MOT - New cars are exempt for the first 3 years. (Yearly)

6- Cost of fuelling - With electric vehicles commonplace, consider your fuel type carefully. Electricity is cheap and the benefits are substantial. (Approx Yearly)

7- Consumables - Depending on the age of your car the bare minimum would be tyres, brake pads, windscreen wipers, engine oil with filter and the pollen air filter. Older cars require major service such as timing belt changes, wheel bearings, electronic issues and steering column issues which can be costly and sometimes impossible to fix. (Unpredictable)

Calculating total cost

How long do you wish to keep your car? The true cost of a car to you is determined once you have sold or scrapped it.

At present one can approximate its running cost by adding all of the yearly values and adding an estimated value for fuelling, based on your average annual mileage and consumables as per the car manufacturers guidance.

Divide the figure by 12 for monthly, or by 52 for weekly cost of car ownership.

Example

I buy myself a Honda Jazz 2020 for £18000 at one year old with 10,000 miles on it.

The rated MPG on this car is 62.8. Lets say 55mpg for sake of overestimating fuel costs to account for a margin of unpredictable driving.

Thats 181.81 gallons of petrol/year, or 822.8 litres/year.

Cheapest UK fuel prices in August 2021 are at ASDA, £1.302/litre unleaded.

This equates to £1071 for a Petrol Hybrid small sized car at 10K miles per annum.

On running a quick search, I am quoted insurance for around £800/year for this car.

Insurance cost approx £800/year

Honda Jazz front tyres last around 15-20K miles. At a 10K mileage/annum you will need to replace them every two years. Rear tyres will also need replacing, probably 6 months later. So 4 tyres in two years

I would normally buy a minimum rating of B for Wet Grip and Fuel economy - This costs £330 for a set of Dunlops.

Tyre costs £165/year

Maintenance schedule indicates an engine oil, oil filter and pollen filter change each year. This equates to £55/year or £110 for two years.

Oil and filters cost £55/year

Honda Jazz depreciate 35% over the first three years when bought new. This has been reported with a confidence interval of 92%. There is variability in percentage values based on mileage of a particular car. For 10K / year, at year 2 it depreciates at around £ 150/month.

To verify true depreciation of a particular car, search for the exact specification car online and find out its invoice price when new. Next step is to check its price in the online and offline market at different age and mileage points.

The Honda Jazz EX Navi was set at MSRP £17,425 in 2018. Currently in the used car market, the same spec car with nearly 30K miles will set you back £12,500 - £13,500 approximately. That amounts to a true depreciation of 22% - 28%.

Consider the somewhat unrealistic upper end of depreciation at 35%, a new Honda Jazz loses an average £1800/year for the first 3 years, bearing in mind the loss is slightly higher for year one. If I keep this car for two years, total depreciation will amount to approx £3600.

Calculating two years of depreciation, starting at end of 1st year of the car's life equates to an approx. £3600 loss (total car age 3 years)

The total CO2 emissions for a 2021 Honda Jazz EX with 1.5L Petrol engine and a hybrid power train is £145/year.

Road Tax is £145/year

There is no MOT for first three years of a new car. My period of ownership is within the specified period.

Total cost of keeping this car for two years, running it for 10K miles, insuring it, fuelling it, changing its tyres, engine oil and filters equates to

In this case, the total approximate cost of ownership is £6200. That is for a 1 year old Honda Jazz kept for a total of 2 years.

-Or £3100 per year

-Or £258 per month

-Or £60 per week

This excludes unexpected repairs which are unlikely in a new car. The standard minimum warranty for most manufacturers in the UK is 3 years.

Consider the following to reduce the cost of car ownership

1- Buy either a new, high-reliability rated car with a dealership discount or a similar used one at point of depreciation plateau.

2- Buy electric, Plug-in Petrol hybrid or Petrol hybrid, in descending order.

3- Keep a clean driving license, take advanced driving lessons and always shop around each year to reduce your insurance premium

4- Drive carefully. It will extend the life of consumables, reduce degradation of your car, provide good mileage and keep your license clean with low insurance costs.

5- Keep the car longer. This leads to some savings as the depreciation averages out.

6- A well-thought out new car purchase may not necessarily cost much more than buying and keeping a used car.

A new car loses its value in depreciation. A used car also depreciates, albeit slowly, but it loses on maintenance and repair costs as well.

Most importantly, a used car is more likely to cost you time.

ALTERNATIVELY,

Use a bicycle most of the time, use public transport sparingly and use taxis during urgencies and emergencies.

There are health benefits to it, improves your time-keeping skills and saves a huge amount of money each month. You should definitely consider it.