What Determines The Cost Of Car Ownership?

Since 2013, the economy began to get a lot stronger and finally, after a long five years of depressed consumer demand, the car market began to pick up. But it wasn’t all good news for consumers. According to the data, the price of a new car has gone up by around 1.5 percent ahead of inflation since the lows of the 2009 recession, meaning that motorists are shelling out more money today than before.

But it’s not just the upfront cost of a new vehicle that counts, it’s the price of keeping it running over the long term. The AAA says that the average family spends about 60 cents (equivalent to £0.50) a mile on their vehicles, adding up to more than £7,000 a year for the average family based on mileage. That’s a lot of money and suggests that the cost of running a car is just as important as the cost of buying it.

A lot goes into determining the cost of ownership, according to officials at the AAA. They recommend that people think about both their present and their future financial situation before making any investments in vehicles. Though consumers might feel rich enough today to finance a £8,000-a-year car, all that could change in the future if the job market were to shift decisively in a negative direction, as some are predicting.

What’s interesting about the current estimates, however, is that they’re primarily based on the idea that people will continue to buy traditional gasoline cars well into the future. Today that seems like a plausible proposition, but the appeal of gas cars is going to plummet dramatically, mainly because of their high running costs. Wired magazine has stated that we could be looking at an electric car revolution by 2022 – the point at which the world will start making enough lithium-ion batteries to make electric vehicles on a large enough scale to make a difference. It won’t just be Tesla alone, churning out 500,000 cars a year. Tesla’s sales will be in the millions, and other manufacturers will also offer compelling alternatives.

This is important because of the costs associated with electric vehicles. Electric sedan owners won’t face annual costs of around £8,000. Rather £8,000 is likely what they’ll spend on maintenance over the lifetime of the vehicle. Sound too good to be true? It’s not. We now have data from a range of Tesla Model S cars that have been in service since 2012 and 2013. Just over the summer, a story came out in the auto press about a Model S that had been used as a taxi which had managed to rack up more than 250,000 miles in just four years. What was so amazing about the car was that the battery had suffered only a 7 percent degradation, something which many pundits said was impossible when all-electric vehicles were originally announced. Then, just last month, another Model S was reported to have driven over 300,000 with just 9 percent degradation. The company that owned the vehicle said that it had spent just £8,500 on it, and £2,500 of that maintenance cost was thanks to damage caused by a collision.

Thus it’s becoming clear that some cars are a lot cheaper to run than others. Of course, Teslas remain frighteningly expensive to buy, which is one of the reasons they are still not the most economical overall, but some cars have better maintenance records than others.

Top Performers

So which cars performed the best? Top of the list were some of the Japanese manufacturers, including Lexus and Mazda, as well as global brands like Ford, thanks to the relatively low cost of Ford spare parts. Ford and Mazda managed to make it to the top of the list of automakers, thanks to a range of factors, including the cost of repair, the cost of auto insurance, low rates of depreciation and overall fuel costs. In the case of the former, Eco Mode on new cars, as well as the Zetec engine will have helped. In the case of the latter, Mazda’s expert knowledge of how to squeeze extra MPG out of their cars, as well as low depreciation helped to propel the company to the top of the list.

Luxury Cars

Luxury cars perform especially badly when it comes to the cost of ownership and value overall. The problem isn’t so much that they’re gas-guzzling and cost a fortune to run. Neither is it the price of insurance, something which can be extremely high. No, the problem owners of luxury cars face is the shockingly high rate of depreciation. 

In a sense, this can be considered part of the cost of ownership: the destruction of capital over time. Cars would be a great investment if they never aged. You could just sell your car once you got bored with it just like you sell on your house. But cars, especially luxury vehicles, eat capital and never earn back the money paid for them. This is because of the type of people in the luxury car market, to begin with. Individuals who buy luxury cars usually want the best and have the money to pay for it. They’d rather not settle for a second-hand vehicle. At the same time, those in the non-luxury car market would rather not buy a luxury car either, thanks to the high insurance and running costs. Thus, as a consequence, buyers in the second-hand luxury car market are few and far between.

Insurance Premiums

The last piece of the car ownership puzzle is insurance costs. This depends not only on the make and model of the car, but a host of other socioeconomic factors related to individual customers, such as where they live and how much money they earn. What determines the cost of running a car, therefore, is quite complicated.

Michael Foote

Quote Goat's founder and money-saving enthusiast.

What Determines The Cost Of Car Ownership?

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