This is a contributed post from Ellie Jo on car tips.
Have you ever wondered how much it actually costs to own a car? If you have, then you’re on the right track. Cars are not cheap. And because they are a depreciating asset, they almost always reduce your wealth.
Unfortunately, buying and owning a car is essential. It’s essential for getting to work, travelling to see family and going on vacation.
In this post, we take a look at some of the major costs associated with vehicle ownership. The idea is to give you a better understanding of what you’re spending and how, potentially, you can protect yourself from financial challenges.
Top of the list of car expenses is fuel — particularly now that global gas prices are going up.
In 2022, no one is quite sure how much drivers will pay per mile, but figures on the order of $0.20 don’t seem unreasonable. That means that if you do 20,000 miles per year, your fuel costs will be $4,000. For some people, that figure won’t seem too bad, but if you’re on a lower income, it could eat up a lot of your budget.
Maintenance And Tires
According to the AAA, the average driver spends around $900 per year on vehicle maintenance, with the figure rising substantially for older vehicles. While newer cars are more reliable than their older counterparts, the cost of techniques and parts to fix them is going up.
Car warranty through Endurance may help some drivers. The idea is to extend traditional three-year warranties offered by automakers for a small fee.
Tires are also a major cost. On average, owners spend around $200 on these. You can reduce upfront costs by fitting second-hand tires but, of course, you’ll get less use out of them.
Insurance prices tend to vary wildly by provider. However, they still constitute a major cost. It’s not unusual for owners to pay more than $2,000 per month, particularly if you are like most people and own an SUV. Hatchbacks tend to cost less, while executive sedans cost more.
The good news is that insurance discounts are available. Providers, like Allstate, offer multi-car discounts and money off your premiums if you don’t get involved in an accident. There are also savings for owners of vehicles with advanced safety features, such as braking-assist.
If you are a student, you may qualify for savings under special schemes that most insurers provide. Some firms actually reward students who get good grades in their mid-terms with lower premiums.
Depreciation is the biggest hidden vehicle cost. The moment you drive a new car off the dealer’s lot, it starts losing value.
Experts believe that depreciation is a full 40 percent of the cost of owning a car. The average vehicle loses more than $3,654 per year, meaning that, after twelve months, you have to accept a lower price.
The majority of depreciation occurs during the first five years of the car’s life. Many vehicles lose 40 percent of their value or more. A car costing $50,000, for instance, might only be worth $28,000 after year five.
For buyers, this is both good and bad news. It’s bad news if you buy a new car, because it means that a lot of your capital is going to evaporate. It’s good news, though, if you buy an older vehicle. While the rate of depreciation as a percentage of the purchase price remains the same, the absolute amount of money you lose is less.
While you can buy a car outright, hardly anyone does this. Instead, most people sign up for a finance agreement of some sort.
As you might imagine, these come in several varieties. There’s the traditional loan. These have interest rates between 5 and 12 percent per annum. Therefore, a $20,000 loan is likely to cost you anywhere from $1,000 to $2,400 in interest alone — a lot of money.
You can roll all your payments into a lease and pay monthly, just like on a conventional loan. The difference with a lease is that you don’t own the vehicle when you finish the term. Instead, you have to return it to the vendor or take out a new lease.
Licensing And Taxes
Lastly, you need to consider licensing, registration and taxes. Drivers spend around $800 annually on these items, but it varies. In some states, you get taxed on the depreciated value of your vehicle every year, so the older your car, the less you pay.