The True Cost of Owning a Car

Why the price of a car is only part of its cost, and how depreciation, insurance, fuel, maintenance and parking add up.

When people think about the cost of a car, they often think of the price tag or the monthly loan payment. But owning a car involves many other costs, some of them easy to overlook. Adding them all up gives the total cost of ownership.

Fixed and variable costs

Car costs fall into two groups.

Fixed costs are paid whether or not you drive:

Depreciation: the loss in the car’s value over time. New cars often lose a large share of their value in the first few years. This is usually the single biggest cost of owning a new car.
Insurance: often required by law.
Registration and road taxes.
Loan interest, if the car was bought with credit.
Parking, especially in cities.

Variable costs rise with each kilometre driven:

Fuel or electricity.
Maintenance and repairs.
Tyres.
Tolls.

Adding it up

In the United States, the motoring organisation AAA estimates the average yearly cost of owning and running a new car. In recent years its estimates have been above 12,000 dollars a year, or roughly a dollar per mile, for a typical new vehicle driven about 15,000 miles a year. Costs are lower for older and smaller cars and higher for large vehicles.

Comparing car ownership with alternatives

Someone driving only 3,000 kilometres a year still pays most of the fixed costs: depreciation, insurance and parking. Divided over so few kilometres, each trip becomes very expensive. For them, a mix of public transport, occasional taxis or car rental might cost far less. For someone driving 30,000 kilometres a year, the fixed costs are spread thin, and owning may be cheaper.

Why people underestimate

Behavioural economists note that people often focus on the costs they pay at each trip, like fuel, and overlook costs that are paid rarely or invisibly, like depreciation. Because the fixed costs are already paid, each extra trip feels cheap, which encourages more driving once a car is owned.

Comparing only fuel costs with a bus fare

A common mistake is comparing a bus fare with the fuel cost of the same trip by car. That ignores depreciation, insurance, parking and maintenance. The full cost of a car trip is usually much higher than the fuel alone.

Key takeaways

The total cost of owning a car includes much more than the purchase price.
Fixed costs include depreciation, insurance, registration, interest and parking.
Variable costs include fuel, maintenance, tyres and tolls.
People who drive little may save money by using alternatives to owning a car.