Steer Clear of Car Depreciation Costs

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NEW YORK (MainStreet) — Overall, inflation came in at a modest 1.6% in 2010, a silver lining in a slow economy. But for those of us who drive cars, costs rose more than twice as much, by 3.4% in 2010, according to a new study by AAA, the auto folks.

Fortunately, the study also offers some insight into how to keep driving costs down. The strategies aren’t terribly surprising and involve things like driving a lighter car with better gas mileage, but the potential savings can be strikingly huge.

Driving 15,000 miles a year can average $11,239 for an SUV with four-wheel drive, or 74.9 cents per mile, but just $6,758, or 45.1 cents a mile, for a small sedan. A large sedan costs $10,982 or 73.2 cents a mile, while the average sedan $8,776, or 58.5 cents, the minivan $9,489 or 63.3 cents, and the medium sedan $8,588, or 57.3 cents a mile according to AAA.

Costs include fuel, maintenance, tires, insurance, registration fees and taxes, depreciation and financing.

While maintenance and insurance costs fell slightly in 2010, those savings were more than offset by an 8.6% rise in fuel costs, the biggest factor in the increase in driving costs. Tire costs rose 15.7%, due to the higher costs of raw materials, energy and transportation involved in manufacturing and delivery. And vehicles themselves also depreciated faster in 2010 than in other years.

“Depreciation continues to be the largest cost for vehicle owners, and yet it is frequently the most overlooked by consumers determining the cost of owning and operating a vehicle,” AAA said. “The 2011 study found a 4.9% increase in depreciation costs, averaging $3,728 yearly for sedans driving 15,000 miles annually.”

Depreciation, or the vehicle’s falling value as it ages, is fastest in the first few years, with cars losing about 30% of their value in the first 12 months, and 65% in the first five years. You can dramatically reduce driving costs by buying a car that is three or four years old already and perhaps paying half the original price for a vehicle that still has three quarters of its miles ahead of it.

Obviously, the strategy pays off even more if you buy a less expensive vehicle, especially if it’s a lightweight model with good fuel economy, so tires and maintenance would also be cheaper. So saving several thousand dollars a year for two or three decades could allow you to retire years earlier.

The AAA study, for example, shows that gas costs 10.5 cents per mile for the small sedan and 17.4 cents for the four-wheel-drive SUV. Depreciation is $2,560 on the small sedan and $5,052 on the SUV, making the financing $584 versus $1,071.

Driving less reduces some costs, such as gas and tires, and will allow you to keep the vehicle longer. Since certain costs, like insurance, registration fees and much of the depreciation are incurred no matter what, driving half as much would not cut your costs in half, though you would save a lot on gas and on tires and maintenance in the long run.

A small sedan, for example, would cost $5,861 driven 10,000 miles a year and $7,619 when driven 20,000 miles. The SUV, meanwhile, would cost $9,815 a year for 10,000 miles and $12,598 for 20,000 miles.

Finally, AAA notes that routine maintenance can extend the vehicle’s life and reduce costs. Soft tires are not only dangerous, they make the vehicle work harder, reducing gas mileage, and a dirty air filter can make the engine less efficient, increasing gas costs.

No matter how you drive, there are ways to reduce the cost of owning a vehicle, and thanks to AAA you now have roadside assistance for your wallet as well as for your gearbox.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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