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true annual cost of owning a car

What is the true annual cost of owning a car?

The true annual cost of owning a car is likely far bigger than you expect because it includes many expenses that you’re probably not considering. For example, things such as car depreciation and unexpected repairs have a huge contribution to the true cost to own a vehicle over time.

Find out everything you need to know about the hidden costs of car ownership so you can protect your financial stability and make well-informed decisions when buying a new or used car.

Obvious car ownership costs

There are four costs that most people associate with car ownership – the monthly loan repayment, insurance, fuel costs, and the occasional trip to the service shop for scheduled maintenance work. Let’s take a quick look at each of them individually.

Monthly car loan payment

Many car owners consider their monthly loan repayments to be the cost of their vehicles. In reality, loan repayments likely account for just 50% of total car ownership costs. At the start of 2023, the average monthly auto loan payment for a used car was $516, according to the credit reporting agency Experian, taking the annual average to a little over $6,000. That being said, monthly car loan payments can vary significantly depending on the sum you borrowed and the terms of your financing contract.

When shopping for a car loan, always remember to check the APR (Annual Percentage Rate), which is a far better indicator of the total annual cost to borrow money than interest rate alone, because it also includes all the lender’s fees. On top of that, factor in the duration of your loan. To put it simply, the longer it takes you to repay the loan, the more interest will add up, making the final purchase price bigger, thus adding to your total cost of ownership.

Car insurance

Another big expense that comes with owning a car is auto insurance, an umbrella term that covers many different types of insurance. Car insurance premiums are highly dependent on individual particularities such as:

  • Age. The older you are, the better your rates.
  • Credit rating. The better your credit score, the lower your insurance premium.
  • Driving history. Recent accidents that were your fault or traffic violations will up your car’s insurance price.
  • Location. Your car’s garaging address is a huge factor in how much your insurance premium will be.
  • Gender. Men tend to pay more for their car insurance than women.

There is also a huge difference in terms of prices between full coverage and state minimum-liability insurance. And for good reason since minimum-liability insurance only protects others from the harm and damages that you cause (when you’re at fault, your insurance pays for the other drivers’ injuries and for the damage done to their vehicles). Full coverage, however, will also compensate you in case your car suffers damages following an accident, a natural disaster, theft, fire, or vandalism.

As stated above, insurance premiums are dependent on who’s getting insured and the vehicle’s garaging address. But, if you are a good driver with a good credit score, you can expect to pay on average roughly $2.000 for full coverage per year and around $500 for minimum liability. 

Fuel

Fuel prices can vary widely from state to state and with the general price of oil. For example, Californians were spending almost 40% more per gallon in July 2023 than the national average. The only certainty is your car’s fuel consumption.

If you don’t want to add to your annual cost of owning a car, then be mindful of your vehicle’s fuel economy.

According to one study done by the AAA, it will cost the average US driver $1,255 per year to drive 15,000 miles in a gas-powered car. That same distance would cost the average compact EV owner just $546 to cover. Even though that’s less than half of what internal combustion drivers pay, if you’re tempted to think that owning an EV makes for a lower total true cost to own a vehicle over time, keep reading. It’s not that simple.

Monthly expenses for car maintenance

Modern cars have built-in service reminders that alert you when it’s time for an oil change, a component inspection, etc. Generally speaking, though, you should take your car in for an interim service every 6,000 miles and for a full service every 12,000 miles or once a year, whichever comes first. 

During an interim service, you can expect the mechanic to change the oil and replace the oil filter, inspect the serpentine belt, and check the tires’ pressure. A full service includes everything you’d get with an interim one plus a general inspection of the air filters (cabin and engine), the coolant, the brake pads and discs, plus some of the car’s belts and hoses.

Since your car’s maintenance schedule is directly tied to how many miles you rack up, you can say that the more you drive, the more you’ll spend on maintenance alone. The average cost per mile for maintenance, repairs, and tire replacement is now 8.94 cents for gas-powered cars, a jump of 0.73 cents from last year, according to the AAA.

Electric cars are cheaper to operate, due to having far fewer parts. They don’t require oil changes or replacing of air filters. The difference in price between EV maintenance and internal combustion maintenance isn’t usually astronomic, though, but rather around $200 to $300 annually, on average.

Hidden costs of car ownership

When trying to calculate the annual cost of owning a car, most drivers include their loan repayment plus their fuel and maintenance costs. However, many fail to consider things such as vehicle depreciation and taxes. Plus, even though drivers are aware that a car needs repairs over time, almost everyone tends to ignore those costs while budgeting.

These hidden costs of car ownership add up to as much as half of the true cost to own a vehicle over time. Let’s investigate.

Depreciation

The biggest component of the annual cost of owning a car, the car’s depreciation, is also one of the most overlooked

On average, a brand-new car loses between 15% and 20% of its value in its first year of life, and roughly 10% every year thereafter. Simple math reveals that, if you drive no more than 15,000 miles per year, depreciation is a greater annual cost than even fuel consumption or insurance. And that’s the ideal scenario.

If you’re unlucky enough to be involved in an accident, if you don’t take good care of your car, if you miss scheduled service appointments, and even the color of your vehicle, these are all factors that can steepen the depreciation curve past the average 10% every year.

Repairs

Drivers don’t even factor in future possible scratches in their auto budgets, let alone more significant repairs like those needed after a crash or a minor accident. Even if a car has an uneventful life, components are still bound to break down occasionally.

Whatever your future holds, repair costs depend on your driving habits. The more aggressive you drive, the more money you’ll have to spend to fix your car, be it to fix the damage done after an accident or to replace parts due to wear and tear.

Registration and taxes

In the US, you must register your car if you want to legally drive it on public roads, but the registration fee and the way it’s calculated differ from one state to the next. Some states ask for a flat fee, regardless of the type of car that’s being registered, while others take the car’s details, such as age, horsepower, or fuel economy into account to calculate fees individually.

Just how big of a difference is there from state to state? The lowest fee charged for registering a vehicle at the time of writing this article was by the state of Alabama at $23. At the same time, Oregon charges between $126 and $156, depending on fuel economy, for gas-powered cars that have been produced after the year 2000. Also, if you register an electrical vehicle in Oregon, you’ll be expected to pay $316, likely the highest registration fee in the United States.

On top of that, some states require you to pay property tax on your vehicle which will be proportional to the value of your car.

Formula to calculate the true cost to own a vehicle over time

If you’re looking for a quick formula to calculate the true cost to own a vehicle over time, you can use this one:

TCO = (original price – current/future value) + registration fee + (annual taxes + annual running costs*) x years of ownership

*Running costs = fuel + maintenance + repairs

This formula applies to cars that you purchase, not cars you’ll drive through leasing. The “original price” is the total sum of money that you pay for the car, which includes the car’s sticker price, all the add-ons and dealership fees, and the interest paid for the car loan, if you took out one.

There are also multiple calculators online that will give you a rough estimate of the total cost of owning a car. 

How to lower your total annual cost of owning a car

Lowering your total annual cost of owning a car is a matter of reverse engineering and as always having a variety of offers to choose from. Below are our top tips that will help you lower your total cost of owning a car:

  1. Buy secondhand. It’s estimated that all cars lose 15 to 20% of their value in their first year out of the factory and around 10% per year after that. It makes sense to buy a car that’s 2 to 4 years old, so you can avoid that massive initial drop in value.
  2. Spend some time choosing your car loan. Shop around, ask for offers from multiple lenders, and you’ll likely get a much better deal that will save you thousands of dollars in interest.
  3. Consider fuel economy. It’s simple, the more fuel your car consumes to drive a mile, the costlier it will be to own and use it over time. Go for the smaller engine or better yet skip the full-size SUV, if you don’t need it, and look at smaller, compact vehicles.
  4. Shop for the best insurance. First of all, see just how much insurance you need – don’t go for full coverage if you don’t own a very expensive car. Then, to get the best deal on the market, ask for offers from multiple carriers.
  5. Drive carefully. Nobody expects to crash their car, but it happens more than you think. Even a simple fender bender can set you back hundreds of dollars. Not to mention that the more aggressive you drive, the more wear and tear your car will register, plummeting its resale value and upping the cost of regular maintenance.
  6. Take good care of your car. Your car will return the care that you put into it by breaking down less often and by retaining its value over time. Follow the service schedule and don’t abuse your vehicle.

Conclusion

The annual cost of owning a car goes well beyond the repayment of your car loan and the cost of fuel. It also includes the vehicle’s depreciation, repair and maintenance costs, insurance, and the taxes and fees that apply in your state. Costs can add up quickly and they can easily overwhelm you if you fail to consider them before buying a car.The true cost to own a vehicle over time is likely bigger than you’d first expect. With some research and a little moderation, you should be able to find the perfect vehicle to match both your budget and your needs.

FAQ

What is the total cost of a car?

The total cost of owning a car includes the repayment of the car loan (if applicable), the car’s depreciation, various fees and taxes depending on your car’s garaging address, maintenance and repair costs, and of course fuel costs.

What costs the most when owning a car?

It depends on how much you drive it. But, if you drive under 15,000 miles per year, then depreciation is likely the biggest cost of owning a car for the first 6 to 7 years of its life. Fuel, insurance, and interest are also considerable costs that come with car ownership.

How can I lower my car-owning costs?

Buy second-hand cars to avoid steep depreciation, shop around for the best car loan to pay less interest, choose a car with good fuel economy, choose the right amount of insurance coverage for your needs, and take good care of your car.

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