When it comes to buying cars, one needs to be careful before drawing any *economic* conclusions based on the sticker price of cars. Generally, we are fixated towards the sticker price because that’s what comes into limelight when we start thinking in terms of auto loans, interest rates, and monthly payments. All our efforts are focused towards comparing things like “which car has the lowest drive-out price”, “which dealer is offering the best deal”, “which bank is offering the best interest rate for my car loan”, etc. Inadvertently, our thoughts are drawn away from long term factors such as depreciation, and cost of operating and maintaining the vehicle. In other words, we tend to pay more attention to the “initial cost of ownership” rather than the “true cost of ownership” of the vehicle in the long run. Not good. 
Comparing cars on the basis of the true cost of ownership (which includes depreciation and operating costs in addition to the initial costs) gives a better feel for the economic implications of your car deal and could potentially save you thousands of dollars down the line.
To highlight this point, I have used an instructive screen shot from Edmunds.com below:
Notice that the Honda Civic, priced at $21,588, is the most expensive car among those compared above. However, it turns out to be the cheapest of the lot when you compare the true cost of ownership ($32,236) over 5 years. As an example, compare the Civic with the Chevrolet Cobalt which has an initial price of $19,439 and the true cost of ownership of $37,182. In this case, you could potentially save $4946 over 5 years by choosing the Civic over the Cobalt, although Cobalt’s price tag is about $2149 cheaper than the Civic’s price tag. That’s equivalent to a difference of about $82 per month for 60 months. Also, the savings will probably keep accumulating beyond 5 years considering the fact that the Cobalt will continue to depreciate at a faster rate than the Civic. Apparently, cars that appear to be cheaper at first glance may sometimes turn out to be more expensive in the long run.
I should mention here that the above numbers are specifically based on Edmunds.com’s assumptions/calculations and they may or may not accurately reflect reality (plus, there will be some geographical variation too). However, for comparison purposes, these numbers are good enough (in my opinion). An example of how the “True Cost to Own” is calculated is shown in the image below (it’s for the Honda Civic that we discussed earlier).
Although, all the data above are for new cars, it would be somewhat fair to extrapolate the relative costs comparison (based on the nature of depreciation and operating costs) to used cars as well. Just keep in mind that, as cars age, their maintenance and operating costs (and sometimes their depreciation) are increasingly determined by how people use them…this calls for more caution when comparing used cars.
So, the next time you are looking for a new or used car, make sure you address the issue of the true cost of ownership, in addition to whatever other cost-reducing measures (like low interest rates, more down payment, buy with cash, etc) you may employ…and see if you can save some major dough.
Of course, we could also discuss about saving money by buying used cars (or not buying cars at all), but that’s not the point here…we will do that some other time.
Btw, I had to obtain a copyright permission from Edmunds.com for publishing the data in this post, and should probably mention a small statement that they emailed back to me with their approval:
Please note True Cost to Ownsm and TCOsm are proprietary service marks of Edmunds Inc., for which we have applied for Federal trademark registration.
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Since my old car got hit yesterday, although it’s fine, my interest in a new car has increased a bit more than what it was. This was a helpful post, I’ll have to check it out.
Something they don’t mention, probably because it doesn’t affect everyone and is very different all over, is the cost of excise tax every year. For a new car in MA, it’s $25/$1000 in value, or $500 for a $20,000 car.
What a great post. I have been using edmund’s for a while and working in the IT field TCO is something we always keep in mind with any project.
I have been trying to apply this type of thinking towards buying a house vs a condo.
Correction from above, the TCO does include excise tax if your state has it.
wish that had included the camery…. since that’s the car i recently bought…. but then again i pay way more then 1,000 a year in fuel and maint…
I was in an accident recently, and this is the exact information I’ve been trying to convey to my wife - if it’s going to cost a certain percentage of the car’s total worth, it’s time to move on and start looking at new (well, new to me) cars instead of fixing an eleven year old civic!
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the one thing that edmunds does not list in true cost is insurance cost. it will definitely depend on region as well as which cars are more prone to being stolen. figure that our insurance dropped when we bought a brand new bmw versus our vw beetle.
So honda civic is the winner
BTW, toyota corolla is not far behind. It might depreciate more, but the initial sticker price is $3500 less than H C. Add 6% tax = about $200.
Put that in FD at 6% or a CD with even higher yield for 5 years (to see the break even)and you’d ve gained over $1300-1500. Which makes the total gain = $5000. Not bad !!
Another point is if you are buying on loan, then u wud need less loan (&wud pay less interest on TC than HC) assuming you get the exact same rate of interest on both loans.
MoneyFwd: Yeah I guess excise taxes are included where applicable. In fact, the TCO estimate is possible only after you enter your zip code…so basically it’s zip-code specific.
Ambellamy: You could compare true cost on Edmunds.com for any vehicle you like. You could compare your Camry to an Accord or Altima and such.
Zen: I agree, there is a point when the repairs are not just feasible anymore. It’s not just economic feasibility…sometimes it becomes stressful when repairs become frequent.
Tim: True cost estimates do cover insurance…but like you said the estimates are different for different regions. Also, different insurance providers will have different estimates…I am not sure how Edmunds take that into account.
Invincible: Toyota Corolla is a good choice too. I deliberately chose Civic to make a point about how the most expensive is the least expensive. Personally, I have some issues with Toyota…especially after we went car shopping with my brother. It’s just “not enough car” for the money (in my opinion). Thanks for pointing out about *investing* the cost difference…it’s probably a topic for another post, I will start thinking along those lines.
‘personally’ i wud always vouch for a Honda Civic than a T C.
).
But if u see, T C is the 2nd cheepest car in your selection, and at the end of 5 years, there isn’t too much difference in depreciation of TC and HC.
So on papers, TC is not a bad deal. HC will definitely survive more than TC, and might fetch more than wot Edmunds says in resale (you know about honda-crazy ppl
i’m too skeptical of the algorithms that edmunds uses, because of the assumptions it uses. come on, how many people actually put 10% down and have Gold credit rating. moreover, the insurance portion is a bit goofy as well. i also checked with some cars that have free maint included, which is somehow depreciated after 3 years, which didn’t make sense to me. anyways, don’t like the thing. it may be a good cursory comparison, but it shouldn’t be taken as the end all. there are too many significant variables that are unique to you that the algorithm cannot assume. i know we only pay $600/year for our 2004 bmw, but edmunds shows average insurance over 4 times that.
BTW, the honda civic is one of the highest stolen cars.
Actually I’d disagree with the post. I am someone who takes MONTHS to make a financial decision and after doing very thorough research, I recently bought a Cobalt! The insurance cost was $400 a year less than the corolla or civic (i live in NoVA / DC). Explanation given by four insurance brokers was that the cost to repair a Honda or Toyota exceeded the Chevy. Also, the price Edmunds lists is incorrect. I got the same model for 15k, while the Civic and others were at the same or HIGHER than what Edmunds lists. In total, I saved about $6750 over the Civic. If you don’t even take the insurance into account…in 5 years, my $6750 will be worth almost $10k - exceeded Edmunds’ listed difference in actual ownership costs. In other words, it always pays to do your own research….
correction - looking back on my spreadsheet -the kia was cheaper than edmunds lists. It was going for about 14k. Looking at it this way, the Kia might actually be the best purchase. But I admit, I wasn’t going to buy a Kia.
It is always better to make some big research first and then decide which car to buy. There is an unwritten rule that the most expensive one cost you much cheaper later on. It is up to you to decide what car to buy - cheap one and then pay alot for petrol, spare parts and things like that or expensive one which needs less petrol and parts. You do the math for yourself.
An important part of keeping down overall car ownership costs is getting the absolute lowest rate for your auto insurance. The much hackneyed saw about spending a few minutes and saving a lot is absolutely correct. Take the extra few minutes to compare quotes from major providers and see if you can’t save at least a few bucks.
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