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The Buying Experience

The real cost of car ownership

by Ed Wallace

Car buyers fall into multiple categories, with two extremes. At one end are the customers who do virtually no homework before going out to negotiate a price on a new model. At the other end are those who have done so much research that they think they know exactly how much they should pay, and have set so many other parameters on their purchase of a new car that they've boxed themselves into a position where no dealer can fully satisfy them.

Most buyers fall somewhere in the middle—and all too often they base their purchase decision solely on how large a down payment is required and how high the monthly payments are. In effect, they've narrowed their focus to just three factors: the profit the dealer will make, the value of their current car as a trade-in, and the interest rate on the loan.

While the size of one's monthly payments is certainly important in any family budget, they're a poor reflection of the true cost of owning a new car. Ultimately, of course, you can't know how much your car or truck really costs until you finally sell it. Only then can you look back on your purchase and accurately determine the full cost of ownership. But you can get a reasonable idea of that cost if you remember to factor in your buying decision the following Component costs.

DEPRECIATION
See if this sounds familiar: "I love my new car, and I'm going to own it for the next decade, so depreciation doesn't really matter to me. "

Although many people say they intend to own their new vehicles until the earth is depleted of fossil fuels, the reality is that most of us trade more frequently than we initially intend to. The average new car sold today is going to be on a used car lot in less than five years.

It's true that if you keep your car for 10 years, depreciation isn't critical. But if you keep it for less time and that, how much it depreciates is likely to be the most important cost factor when you buy your next vehicle. That's because it's usually the resale value of one vehicle that ends up as the down payment for the next one. A vehicle that retains much of its value will thus reduce your future costs.

How can you tell if the vehicle you're thinking of buying will really have the outstanding resale value claimed by your dealer? A good rule of thumb: If the vehicle is a hot seller new, it will likely be a hot seller used.

Also worth considering: vehicles sold en masse to major fleet companies, such as rental-car firms, are notorious for having uncertain resale values. You won't get top dollar for your car five years from now if Hertz has just flooded the used market with 500,000 similar models.

The Internet offers many sources of information on trade-in values, but a better way of assessing the market for a given used car is to check the classified pages of your local newspaper. And then don't be surprised if you find that most of the cars listed there don't sell at the prices their owners are asking for them.

INTEREST RATES
This one should be a no-brainer, but it's amazing how many people jump over dollars to pick up pennies. Sure, saving half a percentage point of even a whole point of interest can add up to hundreds of dollars in the bank. However, "subvented" interest rates from a manufacturer's finance arm can save you so much money that you may be able to afford a vehicle you thought was out of your price range. Subvented interest means the carmaker is spending its own money to reduce interest rates, thus making its products more affordable.

A perfect example is Mitsubishi's recent incentive program for its Montero Sport. We made a number of calls around town and found the average selling price for a well-equipped model with leather upholstery to be about $25,000. Finance that figure at 9.9% for 60 months and you get monthly payment of $529.95.

Mitsubishi, however, was offering an interest rate of only 1.9% for 60 months. Suddenly your payment is reduced to $437.10. The savings? $5,571 over the 60 months. Which means you could have bought the $25,000 Montero Sport for the same payment as a less expensive Honda CR-V financed at 9.9%. Getting a half-point interest break is nice. Getting an eight-point interest break can change which vehicle is your best buy.

INSURANCE
Whenever you purchase a new vehicle, shop around for insurance at no fewer than four reputable companies. Premiums for identical coverage for a given vehicle commonly vary by $100 a year. Often your savings can run as high as $300 to $400 a year.

Figuring those savings over five years of ownership adds up to real money. Who knows? Maybe your present insurance company is already the lowest-cost provider. But you have to shop around to be sure.

A final word about insurance: before you buy a vehicle, check with your insurance agent for rates. Years ago, a friend bought a 110- horsepower Isuzu and was stunned to find it cost more to insure than a 225-horsepower V8 Ford Mustang. Why? Because the Isuzu's tiny 1.6-liter four-cylinder engine was turbocharged, and the insurance company believed anyone who would drive a turbocharged car-110 horsepower or not—was likely to be a hot-rodder.

FUEL ECONOMY
Buyers of big SUVs might not care, but keep this in mind: a vehicle that gets 25mpg will cost you $1,125 less over five years than a vehicle that gets 20mpg, assuming you drive 15,000 miles a year and gas costs $1.50 a gallon.

PAYING THE DEALER
Any car sales person will tell you that among the most depressing experiences is spending four or five hours negotiating a deal, only to have the potential client walk out the door because a competitor beat the deal by $50.

Sure, $50 is real money, but there are other factors to consider. A dealer with a sterling reputation likely earned it by taking good care of its customers down the road, and that costs money. Well-trained mechanics cost more than rookies. A well-stocked parts department costs more than a bare-bones inventory. A dealer that will sell you a vehicle for $50 less but requires you to drive to the next county to get your vehicle serviced isn't saving you anything overall. Price is important, but don't let it be your only consideration.

Ed Wallace, a former automobile salesman and sales manager, is now a consultant, author, and host of a weekly automotive radio talk show in Dallas. His Web site is insideautomotive.aperian.com.

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