June 8, 2008

Look at Total Cost of Ownership when buying a car

Lets say you are comparing 3 cars a 2005 Honda Civic EX, 2005 Ford Focus ZX5 SES and 2005 Hyundai Elantra GT sedan. The Civic is going for $14,168, the Focus is $9,645 and the Hyundai is $9,497. For the sake of example, lets pretend you consider these 3 cars to be equivalent other than sticker price. Which should you buy? It seems the Hyundai is the best option since its less than the other two and the Honda looks like the worst buy by far. Not so fast. If you look at the Total Cost of Ownership (TCO) then the Honda is $29,978, the Ford is $29,450 and the Hyundai is $30,860. The difference in purchase price and TCO is most striking between the Honda and the Hyundai. The Hyundai costs over $4k less than the Honda but overall the Honda will be cheaper to own over the years. The Ford focus has both a low purchase price and a lower TCO overall so its financially the best buy in this example.

There is more to the costs of a car than simply the initial purchase price. The concept of TCO adds up all the maintenance and use costs associated with the vehicle. This gives a better picture of the vehicles actual costs to you to own. The key components of TCO are:

Depreciation: Cars depreciate at different rates. Brands with better demand in the market keep their value better.
Fuel Costs: This one is fairly straight forward. Cars with worse MPG end up costing more to use.
Insurance: Cars will have different insurance rates. A luxury sports car with a high powered engine will cost a lot to insure compared to a modest family sedan.
Repairs and Maintenance: Different reliability levels, different labor costs and different parts prices can all add up to variations in repair and maintenance costs.

Each of these can vary from model to model. The depreciation on the Honda is $6047 or about 43% of its value and the Hyundai depreciates $4756 for about 50% of its value. Fuel costs $8498 for the Civic and $9537 for the Hyundai for a $1,039 difference. Maintenance and repairs are $7,509 for the Hyundai and $5,337 for the Honda for a $1,709 difference. These differences all add up. The Honda retains more of its value, costs less for fuel and is cheaper to repair and maintain than the Hyundai.

So when looking at buying a car make sure to research the TCO and not just rely on sticker prices to determine cost.

You can find TCO data for used cars by going to Edmunds Used Car website and then drilling down to the specific cars you are interested in.

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