Can you really afford to own a new car? Cost of ownership, explained

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CANAFFORD20150609Okay. You finally have a stable job. It pays well and you’ve saved enough cash to put a down payment on the car you’ve been aspiring for. You’ve allotted a considerable percentage of your salary for the car’s monthly amortization and set aside extra cash to put some after-market bling on it once you drive it out of the dealership. You are all ready to plunk down that big amount of cash and issue dozens of post-dated cheques to pay for the auto loan.  The question is, can you really afford that new car?

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Unknown to many, the cost of a car does not end with its selling price. Buyers usually discount the fact that the actual cost of owning a vehicle runs up as it is being used. So the money spent by a person in acquiring a new car does not end with placing the down payment and allocating money for the monthly amortization.  There are a number of other costs that entails owning a new car: this is called cost of ownership.

Cost of ownership includes all the parts, services and assurances a car owner has to spend for during the life of the car.  These costs include fuel, insurance, maintenance, repairs and even depreciation.

Fuel cost can run up to tens of thousands of pesos per year, depending on a car’s fuel consumption. A car is driven at an average distance 15,000 kilometers per year. If a car consumes an average of 10 kms per liter and with petrol prices at P44 per liter, fuel can cost a total of P66,000 annually, or P5,500 per month.

Premiums for comprehensive coverage will vary from company to company.  But on average, a P1 million coverage will cost anywhere between P25,000 to P30,000 annually.  However, owners should be aware insurance premiums should also go down because the value of a car depreciates year after year.

The cost to maintain a car varies widely depending on the brand, model and usage. Different car manufacturers recommend different preventive maintenance service (PMS) intervals. But most cars are recommended to undergo change oil every 5,000 kms.  A regular PMS includes replacing the oil filter and changing the oil. Price of the service and parts varies but a typical oil change for a 1.3-liter Japanese sedan will usually cost P2,500 with oil filter and labor included.  For the more expensive and powerful European cars, the price of a regular PMS can run up to P25,000 per visit to the dealership.  Multiply the amount by the number of times a car has to visit the shop every year, and you can get total the maintenance cost.  Also keep in mind that the higher the mileage a car gets, the more PMS procedures a car has to undergo, ergo, the higher its maintenance cost.

Some manufacturers offer free PMS for the entire duration of its warranty so owners get to save a big amount of money.  Meanwhile, other manufacturers recommend a longer interval between PMS (15,000 kms per PMS), making the cost of ownership considerably less.

Repairs and consumable parts
Cost of repairs and replacement of consumable parts like batteries, spark plugs, tires, brake pads, fuel filter, air filters, as well as fan and timing belts must also be included in the annual cost of ownership.  This amount will vary, however, as the time these parts needs to be replaced differs. For example, a P5,000 battery may need to be replaced every 18 months; P20,000 set of tires, every 50,000 kms (depending on the usage); spark plugs, every year; fan belts, every 40,000 kms, and timing belts, every 80,000 kms.

The interest rates on your auto loan should also be included in the cost of ownership. Supposing you purchase a P500,000 car and you get it on loan with a five year, or 60-month payment scheme.  Let’s say you put a 20 percent down payment of P100,000 and have a loan balance of P400,000 amortized.  The monthly amortization for 60 months would be P8,486.  At the end of the loan term, you would have paid the bank P509,160 for the loan, or an effective interest rate of 27 percent. Add to that the P100,000 deposit you made and your P500,000 car would end up actually costing you P609,160.

Then there’s depreciation.  Depreciation is the biggest cost factor in the cost of ownership. Let’s say you purchase a P500,000 car, put in a 20 percent deposit, and spread the amortization over five years. Keep in mind that a brand new car loses 20 percent of its value as soon as you drive it out of the showroom. From then on, the car’s value depreciates 10 percent year after year. So if you buy a P500,000 and drive it off the dealership, its value will immediately depreciate to P400,000.  By the second year, the car will have a value of P360,000. On its third year, it will be valued at P324,000. On the fourth, P292,000.  By the time the loan is totally paid off on the fifth year, the car will only be worth P263,000, or a 52-percent depreciation.

If you add all the annual cost factors together including the depreciation, spread in five years, that will result in the  car’s five-year cost of ownership.  Say for example you have a P500,000 car acquired through a bank loan that is payable in five years, your annual expenses include: P101,832 in amortization; P66,000 in fuel; P15,000 in insurance premiums; allot P10,000 for preventive maintenance; P5,000 for consumables and repairs; and P47,000 in depreciation, the amount of P244,832 will be the car’s actual cost of ownership every year.

Now that you know all these facts, can you really afford to own a new car?

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