If you have visited a new car dealer in the past 50 years, one of the questions the sales consultant always asks is “Where do you want your payment to be?” Americans are fixated on the monthly loan or lease payment. Most of the time, they could care less about the other costs associated with owning a car, things like depreciation, interest, insurance, maintenance, repairs, taxes, and registration fees. Add all those items together and you get what is known as the “true cost of ownership,” or TCO.
Two cars can be priced the same but have very different true costs of ownership. If that gorgeous new Belchfire 5000 depreciates 40% in the first year while the similarly priced Gargantua XLSTG next to it only depreciates 20%, the Belchfire owner could be out several thousand dollars compared to the Gargantua owner at the end of the first year.
Every year, AAA conducts a survey to determine what the true cost of ownership is for a new private passenger vehicle in the US, and every year the cost goes up. In 2020, it was $9,561. For 2021, that number has jumped to $9,666 or $805.50 per month. That’s the number car shoppers should be focusing on, not the loan payment quoted by that nice person in the finance office. But somehow, people have trained themselves to see only one part of the picture and not the biggest part at that.
“Consumers have to remember the expense of owning a car goes far beyond the monthly payment,” says Greg Brannon, AAA’s director of automotive engineering and industry relations. “Plus, we are seeing costs increase for a number of products recently, and cars are no exception. This trend will likely continue as new vehicles come equipped with the latest technology, which naturally drives up the sticker price.”
The 2021 AAA Your Driving Cost study reviewed nine categories of vehicles consisting of 45 models to determine the average annual operating and ownership costs of each. AAA selects top selling, mid-priced models and compares them across six expense categories: fuel, maintenance/repair/tire costs, insurance, license/registration/taxes, depreciation, and finance charges. Depreciation — a measure of how quickly a car loses value — remains the single biggest cost (40%) of new vehicle ownership. Other key findings of this year’s Your Driving Costs include:
- Fuel Costs: on average, fuel costs 10.72 cents per mile. This is based on data from May 2020 – May 2021, which does not include recent spikes in gas prices. Fuel costs vary widely by vehicle type, ranging from a low of 3.66 cents per mile for electric vehicles, to 15.81 cents per mile for pickup trucks. [emphasis added]
- Maintenance, repair, and tire costs: on average, maintenance and repair costs 9.55 cents per mile. Just like fuel, electric vehicles are on the lower end of the spectrum, costing 7.70 cents per mile, while medium sedans are the most expensive at 10.43 cents per mile.
- Finance charges: the cost of vehicle loans decreased due to a drop in the prime lending rate. The average interest rate in 2021 is 4.12%, which is 1.056 percentage points lower than last year.
Sales of sedans and minivans have plunged in the last several years, with many manufacturers no longer offering them for sale in the US market. Accordingly, AAA has dropped minivans and large sedans them from its annual TCO survey and replaced them with sub-compact SUVs and midsize pickup trucks.
The average price of a new vehicle for 2021 is $32,903, which is $1,502 (4.78%) higher than last year, mostly due to the addition of new models to the Your Driving Costs study, says AAA. Models in the small sedan, medium sedan, medium SUV, and hybrid categories averaged an increase in vehicle price of $3,064, led by hybrids as consumers opt for larger (hence more expensive) models in this category. Pickup trucks saw an increase of $4,684 (an average of 11%); however, this has not affected their popularity, as they remain the best-selling category of those included in the study.
People scream if the price of gas goes up a nickel, but they can’t wait to shove their money into the dealers’ pockets to buy vehicles with the highest fuel costs. Logic and common sense have very little to do with the new car sales process.
AAA offers the following guidance when it comes to shopping for your next vehicle:
- Before considering any specific makes or models, consumers should determine what makes sense for their budget including trade-in value and down payment amount.
- Another important consideration is whether to finance or lease. For someone who is an early adopter of new technology, likes to change cars often or doesn’t put a lot of annual miles on a vehicle, leasing may make more sense. Consumers should evaluate both options and pick the one that will best suit long-term needs.
- Manufacturers and dealerships sometimes offer extended loan terms as an incentive to buyers. In some cases, these loans can be as long as 84 months with interest as low as zero. Initially, a loan like this may be attractive to a buyer since it helps lower the monthly payment. However, consumers should know that with long-term loans comes a period of time when the vehicle will hold less value than what is owed due to depreciation.
- Look at pricing options for both new and slightly used vehicles. New vehicles typically come with longer warranties, buying incentives from the automaker, the latest features and are widely available. When it comes to used vehicles – there are two types to choose from – certified pre-owned and used. The advantage of a certified pre-owned vehicle is the original owner has absorbed the majority of the depreciation cost, while the vehicle still has quite a few of the latest features and a manufacturer’s warranty.
- Consumers should test drive the exact model of the car they want to purchase. If possible, they should pick a route that mirrors their daily driving routine. It is a good idea to test the car’s ride quality and handling on a number of different road surfaces: city streets, hills, freeways and winding roads.
- The most important thing to remember is in most cases, there are three separate negotiations that occur when purchasing a car: the price of the new vehicle, trade-in value and finance rate if applicable. Consumer should take their time and negotiate them individually.
It might be appropriate to mention here that Tesla vehicles have some of the lowest depreciation of any cars on the road. Check the used car ads and you will be surprised to find many used Teslas are selling for more than they cost new. That’s cuckoo. If you are one of those people who likes to talk about how OMG expensive Teslas are, you might want to consider that many Audi, Lexus, Mercedes, and BMW models shed value like water through a sieve as soon as you drive one of the lot.
If you fail to take true cost of ownership into account, you are doing yourself a huge disservice and putting yourself in the situation where you may owe more on your car loan than your car is worth, making it hard to get rid of your old ride without going deeper and deeper into debt.
Don't want to miss a cleantech story? Sign up for daily news updates from CleanTechnica on email. Or follow us on Google News!
Have a tip for CleanTechnica, want to advertise, or want to suggest a guest for our CleanTech Talk podcast? Contact us here.