What Does it Really Cost to Own a New Car?

 By Catherine Powell

There’s nothing like owning a new car.  If you're considering buying one soon, you really owe it to yourself to understand the total cost the vehicle will represent during its lifetime.  With an average cost of $45,031 in 2021, the first time in history the price has exceeded $45,000, the sticker shock of ownership isn't something for the faint of heart these days.  But this is only the tip of the iceberg in what to many folks is the second-highest monthly expense they'll pay after rent or mortgage.  If you don't want your next ride to take you for a ride, there are a few things you need to know before you drive off the dealer lot.

What is the true cost of owning a vehicle?

Otherwise known as the total cost to operate (TCO), this represents the purchase price plus the cost of operation.  In other words, we're talking about the long-term cost to operate the vehicle.  This figure is determined by adding the price you pay for the vehicle (including interest) plus the operating and maintenance costs.  In 2020, the average TCO for a year was $9,561, which boils down to $797 per month.  Depending on such things as the make, model, warranty, plus fuel efficiency of your vehicle, the actual TCO could prove to be higher or lower than average.  Below I'll cover the particulars in greater detail to show you how to determine the TCO of any vehicle you're considering.  

How much debt did you drive off the lot?

While you may think you got a real deal when you drive your new car off the lot, be sure to factor in all the associated costs.  These include everything from the sticker price and destination charges to state taxes and licensing fees.  Don't forget that unless you paid cash for your new vehicle, you'll also need to factor in the interest rate from your lender.  You may not know it, but rising federal interest rates not only mean you'll likely pay more to finance a new car today than you did when you bought your last vehicle, but according to AAA, for every extra year you agree to finance your purchase, you'll add nearly $1,000 a year to the cost.  

What does it cost to insure your vehicle?

Depending on the make, model and options, and your geographic locale, this figure can vary greatly.  While the average cost for full coverage in Maine is $963 per year, the same coverage in Florida averages $2,321.  Other factors that come into play include your driving record, the number of miles you drive per year, the discounts you qualify for, your credit rating, your marital status, your current credit rating, and the insurance company you select.  A quick call to your insurance agent can help you determine how much you'll pay to insure any vehicle you desire.

How do you calculate fuel and maintenance costs?

Other variables that you have some influence over are fuel consumption and maintenance costs.  Even if your car comes with a 5-year bumper-to-bumper warranty, there are some things you'll be required to pay for out of pocket.  These include fuel, oil changes, and tire replacement.  If you drive less than 5,000 per year, these costs will set you back less than a road warrior who drives 20,000 miles per year.  But they will still need to be paid.  Even fuel costs can vary wildly different for different drivers, even those who commute the same amount of miles.  Everything from how heavy your foot is on the pedal to your vehicle's average MPG, not to mention the cost of gas can make a difference in how much you'll pay to fuel your vehicle for a year.  According to AAA, the average cost a driver spent on fuel in 2020 was $3,000.  Divided by 12, that equals $250 per month.  Since the cost of a gallon of gas has risen substantially, this means the average cost will also rise in 2021.   

How much does a new car cost you after 1-year?

Another factor that many drivers fail to calculate is depreciation. Did you know that the average vehicle in the US loses 23.5% of its value in the first year alone according to Edmunds?  By the end of 3-years, the average vehicle will have lost 46% of its value.  That means your $40,000 car will then be worth only $21,600.  Depending on the condition and mileage driven, the depreciation could be even greater.  That's the bad news.  The good news is if you use your vehicle for business purposes, you might be able to deduct some or all of the depreciation from your taxes.

Do you qualify for federal tax credits?

If you own an electric or hybrid vehicle, you could qualify for federal tax credits of up to $7,500.  I say "up to $7,500" because not all EVs qualify for the credits and you must have a tax bill of $7,500 or more to get the full benefit.  If you buy a qualified vehicle and only owe $2,500 in taxes that year, don't hold your breath waiting for Uncle Sam to stroke you a check for the remaining five grand.  Since not all EVs qualify for a rebate, you should check on the IRS list of vehicles to see if the car you have your heart set on purchasing qualifies.  https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit

Do you plan on using your new vehicle for business purposes?

This could save you even more in tax deductions, even if you don't purchase it with that purpose in mind.  Everything from sales calls to travel to and from a place of business other than your office could qualify for a tax deduction.  In Florida in 2021, the deduction is worth 56 cents per mile, provided you can document the travel.  

What's the magic formula for determining the TCO for your vehicle? - If you want to determine how much it costs you to operate your vehicle for the year you need to perform the following calculation:

Yearly cost including financing & taxes + fuel & maintenance + insurance - deductions for business use and/or federal tax credits 

Catherine Powell is the owner of A Plus All Florida, Insurance in Orange Park, Florida.  To find out more ways to save on flood insurance, check out her website at http://aplusallfloridainsuranceinc.com/