What
Do You Really Pay For Your Car?
By: Grant W. Repsher
The true cost of your car
Just your average sedan
Hidden costs
Even though for many the financial transaction that is the automotive purchase is one of the largest they may ever make, it's actually fairly straightforward when you boil down all the rebates, financing, tax, title, registration and any other intangible fees that may trip you up. Whether you lease, purchase, or choose some other specialized arrangement, auto dealers often create complexity to some degree per their advantage.
Once a customer has made the emotional commitment to purchase a vehicle, the salesperson/sales manager combo has at their disposal many different ways to design the transaction with their own profit in mind. By capitalizing on even one or two popular customer misconceptions, they can ensure that "the house always wins."
Makes a pretty good argument to both do your homework and make a dealer a friend of the family.
For example, you will see in the paper and online ads for vehicles on sale for $299 or $339 per month. But what does that tell you about the nature of the deal? Absolutely nothing. Because there are several dimensions to an auto deal, any vehicle -- at any price -- can produce almost any monthly payment the sales manager wants. It doesn't matter if it's a $15,000 Toyota or a $50,000 BMW. You can rest assured that if you're getting a discount on the down payment, you'll make it up somewhere else, whether it be in the rate, the duration of loan, the residual value, the dealers fees, the acquisition fee, the lease termination fee, or the security deposit.
Even if you have a good handle on all of these terms, it is in their orchestrated combination where profit and loss lies. This is by no means a criticism or indictment of all dealers, as there are plenty of honest ones out there. It's just that this is how the game is played.
With all of the information available to consumers these days, the average per vehicle profit has diminished, meaning dealers have to make the money when they can. It's up to you to make sure you're on the right side of the equation.
Also, the payment/price issue is hardly limited to just the auto purchase. Sure, it's easy enough to find out how much it will cost to get an oil change, rotate your tires, and get that rattling ashtray fixed. But do you have any idea what you spend on automotive service and maintenance over the life of your vehicle?
Considering a single service would be a bit like focusing on the monthly payment. It really doesn't tell you much. And let's be honest, other than thinking, "Gee, I wonder how much the service will be for this," we don't often think about maintenance costs. Now, auto service costs don't generally vary as much as car payments do, but they certainly differ depending on the vehicle you choose.
Another area in which you might find some confusion is when you go to look at your insurance invoice. Why can't insurance companies just come right out and tell you what the premium is? For one thing, that would make it to easy to compare it to other rates.
So instead, expect to get a whole lot of , "This is your premium for 6 months, if you pay it monthly, but we are giving you a month free, so it is really five charges, spread over six months," and so on.The reason the auto industry continues to operate this way can be summed up by one word: Emotion. Unless you're buying something strictly for your business or are the type of person who generally doesn't give a hoot what takes them from point A to point B, (in which case, you really are visiting the wrong site here), then emotion creeps into even the most disciplined of shoppers. And the rest of the people who work in the industry -- whether they make the car, sell the car, fix the car, insure the car, or even steal the car -- depend on it.
Ernest Hemingway once said that pheasant shooting was worth whatever you had to pay to do it, a sentiment that Automotive Writer and Editor, David E. Davis also used to describe the privilege of driving a Lamborghini. And while the same can't quite be said about driving your "spec" econobox, we are certainly willing to pay for our rides. How much? More than you might think.
AAA recently came out with its annual cost average to drive a vehicle. Here are the figures for 2007:
Medium Sedan, Average Cost to Drive* $9,641/yr
*Costs based on: (Fuel - $2.25/gal, average EPA fuel economy ratings, 60% highway - 40% city driving, 20,000 miles/yr, Maintenance - based on standard service & repair as recommended by manufacturer, Insurance - based on 47 year old male, low mileage, good record standard 100/300K, $500 deductible, Tires - cost for one set of replacement tires, Depreciation - 1 year of five depreciation, Finance - based on 5 year loan, 6% interest, with 10% down payment, plus average License, Registration and Tax fees. See: AAA Driving Cost Guide, 2007 (PDF)
For argument's sake, consider that the average car loan, according to Experian (2004) is about $23,000 and the average payment is $383.00/mo. When a sales tax of 6% is added, you get a loan payment of $405.98/mo or $4,871.76/yr. The Cost to Drive calculation already includes a $743 (average) finance charge, so the total annual Cost to Own (loan) would be $4,178.22/yr.
Medium Sedan, Average Cost to Drive $9,642.00/yr
Medium Sedan, Average Cost to Own** $4,178.22/yrMedium Sedan, "Total" Cost $13,770.72/yr
Broken down to a cost per mile basis (20,000 miles) you get:
Medium Sedan, "Total" Cost: 68.85 cents/mi
For reference, at today's rates, the 566 mile round trip from Birmingham, MI to Union Station in Chicago on Amtrak will cost $69 (12.1 cents/mi) vs. $389.69 (68.85 cents/mi) by car, or roughly 5.5 times as much. Taking to the air paints a similar picture, with the average cost per air mile flown for an average 2,000 mile airline flight costing $258 (2005) or 12.9 cents/mi.
Now, of course, you can interpret these numbers in a lot of different ways, and it's a bit like comparing apples to banana peels, but at the end of the day we really don't know what it's actually costing us to drive. And this doesn't take into account other intangibles like convenience, environment impact, and safety.
Studies by the US Department of Labor Statistics and other online resources are showing a trend in what they consider vehicle overspending. They say consumer spending on transportation has increased by 12% over the 1999 to 2005 period -- this at a time when median income essentially didn't rise at all. Also, the average car loan has grown in length to well over five years in 2006 from four and seven months on average in 1990. A full 80% are now at least four years long.
One of the major contributors to the spiraling automotive costs is the practice of rolling debt into a new car purchase, something that further distorts the actual price. From a purely financial standpoint, even buying a car (a depreciating asset) at all makes little sense, especially when you have to borrow (and pay interest) to do it. This quickly brings people to the "upside down" scenario, where a car is worth less than the balance of its loan.
When consumers get antsy to get into another new vehicle, dealers will do their best to bury the debt leftover from the previous car in the new vehicle's payments. Some people simply don't realize it (some just ignore it), but you're still paying for the rest of the first car on top of what you negotiate for the new one. The new (stretched) loan will flip over financially even quicker than the first, and so begins the automotive death spiral. At the end of 2006, the average trade-in contained $4,000 of previous debt that was going toward the purchase of a new car.
Now consider that you are in the spiral and you have to deal with all of those other ownership costs including maintenance and repair. Here is a very general scenario for your basic Medium Sedan driven 20,000 mi/yr.
Year 1 - Oil Change (2x) $150 ($75 each)
Minor Maintenance $300
Year 2 - Oil Change (2x) $150
Minor Maintenance $300
Year 3 - Oil Change (2x) $150
Major Maintenance $600
Year 4 - Oil Change (2x) $150
Minor Maintenance $300
Year 5 - Oil Change (2x) $150
Major Maintenance $600
Other repairs $600
(brakes, wipers, etc.)Service and Maintenance during loan period $3,450
These necessary expenses equal roughly the equivalent of an extra nine car payments (three quarters of the year's amount) for one Medium Sedan. Add a second vehicle -- or worse, an SUV --- and the prices climb even further.
For those of you who would like a better idea of what you really are spending for the freedom of driving your car, you can see the AAA site and follow an online form (just don't forget to add your actual loan payments).
To look up what the average fees and taxes cost for a particular vehicle, or to see the average by state, click here or here respectively. By the way, the cheapest state for taxes and fees is Oregon, and the most expensive is Nevada.
Makes you think twice about the "Sale!! $189/mo." offers you see so often.
Grant W. Repsher is the founder of Servassist Online. He is a writer with Automotive News, the auto industry's premier trade publication, and a former contributing editor with the AIADA (American International Automobile Dealers Association). To contact Grant about this article or to suggest future topics, please click here.
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