August 2, 2012

Car Cost : MSRP versus Total Cost of Ownership

 Normally when people shop for cars they look at the sticker price primarily.  However it is also very important to consider the Total Cost of Ownership (TCO) for a car and not just the up front sticker price.   Its been a few years since I talked about TCO.  

Say for example you had 2 cars to choose from and both cost $17,000.  If one of the cars had 20 MPG and the other got 40MPG then the car with better mileage would be cheaper to operate and therefore cheaper overall.    Expanding on that idea the TCO number figures the total cost of operating a car including fuel costs, insurance, financing charges, maintenance, and depreciation.  

Lets look at how this concept can impact your shopping for cars.    I'll look at a selection of low MSRP cars and some hybrids as well.   I used Yahoo Auto website to get the MSRP and TCO figures.   These are new 2012 model cars and I limited the filter to cars that seat 4 people minimum.   I picked a few cars to do an example comparison but this is by no means any kind of complete list.

Note : If you're looking for a cheaper option then you should consider used cars.   Edmunds has data on used cars and they figure a TCO number too.   I'm using new cars on Yahoo for the example simply cause they have TCO data on more cars and its easier to compare 2012 models across the board.


OK... on with the example. 
Here is a selection of cars with low MSRP and some hybrid models:



MSRP
Nissan Versa $10,990
Hyundai Accent $12,545
Ford Fiesta $13,200
Kia Rio $13,400
Chevy Sonic $15,065
Toyota Yaris $15,140
Kia Forte $15,200
Mazda 3 $15,200
Honda Insight $18,500
Toyota Prius C $18,950
Toyota Prius II $24,000
Honda Civic Hybrid $24,200

As you can see the hybrids are not the cheapest cars on that list as far as purchase price.   But do the hybrids cost less overall based on TCO?

Lets look how the cars rank as far as TCO on an annual basis :




Annual
Nissan Versa $5,691
Hyundai Accent $5,764
Kia Rio $6,068
Toyota Prius C $6,149
Ford Fiesta $6,203
Kia Forte $6,321
Toyota Yaris $6,366
Honda Insight $6,623
Chevy Sonic $6,789
Mazda 3 $6,873
Toyota Prius II $6,950
Honda Civic Hybrid $7,206

The Nissan Versa and the Hyundai Accent are still the cheapest cars on the list but after that the order changes.    Notice that the Toyota Prius C jumped to #4 on the list.  

But what if you drive a lot?   Hybrids with their high gas mileage ought to do even better in a comparison that assumes higher mileage.   The standard TCO figures are based on the assumption that you drive 15,000 miles a year.   But you can also choose to look at TCO based on 20,000 miles per year.   If we do that then the list gets changed a little more :



20k miles
Nissan Versa $7,537
Hyundai Accent $7,699
Toyota Prius C $7,849
Kia Rio $8,065
Toyota Yaris $8,179
Ford Fiesta $8,217
Honda Insight $8,369
Kia Forte $8,538
Toyota Prius II $8,749
Chevy Sonic $8,751
Honda Civic Hybrid $8,893
Mazda 3 $8,973

Now the Prius C has jumped to 3rd on the list and is only about $300 less than the Versa.   Still the dirt cheap Versa with its sub $11,000 price tag is your cheapest car in the long run.

If you were comparing just the Nissan Versa and a Toyota Prius C then the Versa wins in any comparison.    But what if you were looking at a Kia Rio versus a Prius C?    Thats a situation where the winner varies depending on the circumstances.  

If you drive less then the Kia Rio is $6,068 a year and the Prius C is $6,149.   With average driving the Kia Rio is marginally cheaper than the Prius C hybrid.   However with higher driving of 20,000 miles  a year the tables are turned and the high mileage of the Prius C puts it ahead of the Rio.   For 20,000 miles a year the Prius C costs $7,849 and the Rio is $8,065.

It should be pointed out that the TCO numbers are based on some guesswork and averages.   The depreciation of a car isn't known in advance and they based the depreciation rates on the history of the brands in question.    So we don't know for sure that a 2012 Toyota will depreciate less than a 2012 Chevy but thats what has happened for those brands lately.   Also the costs assumed for things like insurance, maintenance and repairs are based on averages as well as some brand history.  If Mazdas have higher maintenance costs thats based on general assumption on Mazda part prices and quality history.    Your own costs for repair and maintenance are not known and will vary.  You may luck out and have a car that runs without repairs for years or you may get stuck with a semi-lemon that keeps breaking down.   Without a crystal ball the best we can do is make assumptions based on the history of the brands.   Of course people make assumptions based on brand perception when making purchases anyway but the TCO actually puts some real data into the formulas.

Clearly there are many other factors to consider when buying a car.   Safety ratings of the cars, warranty coverage, interior and exterior features and aesthetics are generally important elements to consider.    For example a Nissan Versa may be a little quicker than a Toyota Prius C but the Toyota may have a little more passenger space.  Either of those factors may matter to a buyer.

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2 comments:

  1. How many years do the TCO calculations assume you will own the car?

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  2. SteveD : I forgot to mention that. The TCO calculations assume that the car is owned for just 5 years. They also assume you finance the purchase. You'll do better on an annual cost if you own a car longer and if you don't pay interest of course. If you used a shorter or longer timeframe for the TCO then I think the numbers would mostly come out in similar rankings though there could be some minor differences.

    Jim

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