Total Costs of Ownership
Overview
Many people make some assumptions when it
comes to the true cost of running their car.
It can sometimes be a real eye opener!
The most basic
assumption is usually the fuel consumption, “oh, I reckon I return about 40 to
the gallon. I put a tenner in a week,
and that usually does me.” When you
enquire as to how many miles they do, the response is often, “oh, not many,
just to and from work, maybe a supermarket run, during the week.” Start working it out if you have never done
so before, and it can become quite frightening if you drive a lot in the city.
One example was
an individual at work, who typically drove around 7,000 miles a year in a 1994
Ford Escort 1·4. A few calculations
illustrated that the fuel economy was only around 33 mpg during the week. The individual was keen to change to
something a bit more economical (“about
40 to the gallon” – Dervy rolls his eyes upwards), but in the same
size of car, but not a diesel, and with a reasonably small budget. I also proved the following: for an assumed
annual mileage of 7,000 a year, with a benchmark economy figure of 33 mpg, it
would cost a total £723 a year in fuel, at an assumed price of 75p per
litre. At 40 mpg, this reduced to £597,
an decrease of just £127. This saving
would be rather insignificant within the context of the other payments being
made for the car, and could also easily be made up elsewhere. Opting for something that could return 50 mpg
would yield a total saving of just £246 over the 7,000 miles.
Another example
was a colleague considering replacing his 2·0 petrol Peugeot 406 for the HDi
version, because he now had a 42 mile commute each way. He typically returned 35 mpg from his 2·0
litre Peugeot 406, over around 35,000 miles a year, including business trips
and social use. This was costing him “a
small fortune” - £3,410 a year. If he switched
to a 2·0 Peugeot 406 HDi and returned 50 mpg (slightly under the Euromix figure for both the 90 PS and 110 PS
versions), he would save himself over £1,000 a year in fuel bills, rising
to £1,200 if he managed to average 54 mpg.
These figures are far more significant.
The cost of
insurance premiums must always be factored in to the total ownership
costs. Sadly, for young drivers, these
premiums are excessive. I have always
baulked at paying more than £600 a year for insurance, even when younger, but
these days, premiums can be in the thousands for just a newish 1·25
Fiesta. With such sky high premiums,
most other aspects of running the car (except,
perhaps, any regular monthly repayments) become insignificant.
However, for
those of us fortunate to have some no claims behind us, and some history, our
premiums are rather more sensible.
Whilst an insurance hike of £200 might seem rather expensive, in the
context of the fuel used for a motorist 
covering just 7,000 miles, at 40 mpg, it
is not all that much.
Fuel
When you ask
somebody how much they spend on their car, the first thing that people usually
think about is how much petrol (or diesel)
they will use. Some people will tell you
that they go through about a tenner a week, some nerdy people will report that
they have averaged 37·6 mpg over the last 8,543·4 miles /cough/ and some pull a figure out of thin air,
and report that “it averages about 40 to the gallon.”
Insurance
Everybody
should have it, and premiums vary immensely.
Young and newly qualified drivers pay a lot of money for cover, and as
we get older and more experienced, our premiums (for a given car) tend
to reduce.
Service & Maintenance
Just as we need
to put fuel into our cars, we should also get them serviced, and make repairs
as and when required. Some owners only
get their car serviced when it goes in for the MOT, and then only because
something needs fixing. Other owners set
up computer programs to track their mileage and report when the next service or
oil change is due, and suggest a booking date, to the day /cough/. Most people get their car serviced when it is
due, at least, during the early years.
Road Fund Licence
For many
people, this is usually one of the least expensive aspects of buying a car -
but there are people out there who pay more on their road fund licence than
their insurance (lucky gits!).
Accessories
Obviously,
accessories need to be paid for - that new stereo, those alloy wheels, or a new
air freshener every few weeks. Some
people spend a significant sum on accessories - new car mats, a chamois
leather, polish, air fresheners, fluffy dice and in-car PlayStation 2 / DVD
combination systems.
Depreciation
Depreciation is
usually considered the major cost in car ownership. This is not always true, but in most cases,
the loss of value of a newer car will far outweigh the fuel, insurance, and
service costs. Depreciation is a factor
in all cars, but some models are less susceptible than others. Depreciation also varies - the future value
of a current car is as much open to supply and demand as anything else. If a car with a traditionally low rate of
depreciation is superseded by a revised, different-looking model with the same
name (enter the
Leasing a
vehicle is one way to set your depreciation costs, providing you follow the
contract to the letter, but this is not without its own pitfalls.
Finance Costs
This may be
considered in two ways. One is the lost opportunity cost - in other words, if
you had of invested the cash rather than spent it on a car, what returns could
you have expected? The other is the
interest charges that you you pay for borrowing the money.
Tax
If you have a
company vehicle, you are taxed for the privilege. If you are given private miles fuel benefit,
you are also taxed on this, too. This is
not the place to go into great detail over the taxation charge, but it is
currently based on the CO2 output of the car and the list price, including
options. The fuel benefit is based on
the size and type of engine.
For an example
to work, we will have to lay out some assumptions. We’ll take three years of use, and our Mr.
Average covers 12,000 miles a year across varied driving conditions, but will
average precisely the Euromix economy figure from the car. He always gets his car serviced at the
dealership when due, and for our service costs, we use the What Car? three year
cost figures (or the DervMan Guestimate). The price of fuel is 74p per litre for
unleaded and 76p per litre for diesel.
For insurance purposes, we’ll use the Datasheet estimates. Average also always pays the full list price
of the car, and never gets a discount.
We must also assume that Mr. Average buys his cars with cash in the
bank, rather than takes out a loan or a hire purchase agreement.
All of the
following calculations are as estimates,
using the Datasheet, and cannot be relied upon as actual running cost figures.
We will take
Average’s current vehicle as a benchmark, a 1998 Ford Escort 1·4.
Fuel cost:
£3,726
Insurance: £789
Road Fund
Licence: £300
Service: £720
Total: £5,535
If we exclude
depreciation, our Escort will cost us £5,535 over three three years and 36,000
miles.
The direct
replacement for a 1·4 Escort must surely be a 1·4 Focus, so we’ll use the data
for the 2001 model.
Fuel cost:
£2,829
Insurance: £720
Road Fund
Licence: £300
Service: £864
Total: £4,713
Excluding
depreciation, the 1·4 Focus is considerably cheaper than the 1·4 Escort to run
over the same period. Most of the saving
is in fuel consumption.
However, if we
add depreciation, the base 1·4 Focus had a list price of £10,460, and is
estimated to be worth just 36% of this at the 36,000 / three year stage. In other words, it should have a value of
£3,766. So add the difference (of
£6,694) to reach a greater total of £11,407 over the three years.
This assumes
that Average will replace the car at the three year stage.
If Average were
to run a smaller car, say, a Mark Four Fiesta 1·25, the running cost figure
would be £4,839 (to his surprise,
slightly higher), but the depreciation (the
£8,660 car would be worth £3,291) much lower, at £5,369. Thus, the total ownership costs would be
lower, at £10,208, a saving of around £1,200.
If Average
opted for a larger car, the base model Mondeo 1·8, his running costs would be
higher (and just above those of the
Escort), at £5,576. Although the
Mark Three 1·8 Mondeo manages a creditable 36·7 mpg, the insurance is
considerably dearer compared to the other examples, and the car costs the full
£160 for road fund licence. Depreciation
on the £14,645 car is expensive: the car will only be worth £5,126 at the end
of the period, so it “costs” him £9,519.
The total ownership costs over the period amount to £15,095, making this
a rather expensive choice.
How about a low
depreciating, small diesel? Surely, that
must be very cheap? Not always! Small diesels are often expensive to buy, so
to take an example, we’ll compare the Volkswagen Lupo TDI with the 1·4 petrol.
Fuel cost:
£1,938 / £2,655
Insurance: £720
/ £789
Road Fund
Licence: £300 / £300
Service: £808 /
£1,010
Total: £3,766 /
£4,754
Depreciation:
£5,075 / £4,243
Grand Total:
£8,841 / £8,997
So as we can
see, yes the TDI is cheaper, but not by much.
If Average were to take out a loan or hire purchase agreement to fund
the new car purchase, the TDI costs some £2,000 more than the 1·4, and the tiny
difference in running costs would not make up for the additional interest
charges.