Owning a car can be a great way to get around, but it’s important to be aware of the costs involved. It’s generally advised that you shouldn’t spend more than 10% of your income on transport costs, and yet the cost of leasing a basic hatchback and spending £100 per month on fuel, will cost someone earning the average UK salary 12% of their take home earnings. There are so many different costs to consider when purchasing a car, some more obvious than others. Below we outline these various costs of car ownership to help prospective buyers make an informed decision.
Direct costs of owning a car
The car itself
Buying a new vehicle can be really expensive. Even the most “affordable” car brands, such as the Dacia Sondero, will set you back £13,750. Older cars, especially those that have a lot of miles on the clock, can be a lot cheaper but typically are less reliable and incur more costs in terms of repairs. Buyers need to try to find the “sweet spot” between reliability and cost
Insurance
Car insurance is required by law in the UK. The cost varies greatly, depending on a lot of different variables. Most important are factors such as the age of the driver and how many years no claims they possess, plus the type of car being insured. We look at ways to bring down the cost of car insurance in this post.
Road tax
The cost of road tax correlates with the CO2 output of a vehicle, ranging from £0 to £2,605 per year. Electric cars currently incur no road tax costs, although this may be subject to change in the future. A big engine, old, diesel vehicle will cost the driver a lot to tax. Related to this, London has introduced an additional tax: “ULEZ” (£12.50 / day) for vehicles driving through London that don’t meet emissions standards.
MOT
Another cost required by law. This annual vehicle health check is designed to ensure your vehicle remains safe to drive and is not in need of any urgent repairs. An MOT can cost as little as £50 but can also be incorporated into the cost of an annual service, typically cost around £200. Opting for a service can be a good idea as it helps maintain your vehicle. A vehicle with a history of regular services typically keeps its value better at the point that you sell your car.
Fuel
Due to the rising cost of oil, fuel prices have increased significantly in recent times. For buyers of petrol or diesel vehicles, close attention should be paid to the advertised miles per gallon (mpg) figure. Anything over 50mpg is considered economical and hybrid vehicles can achieve an MPG of 60+. Due to current electricity costs in Britain, even electric vehicles are proving expensive to run. As Britain increases its production of renewable energy sources, the cost of charging an electric vehicle should start to come down and generally become a greener option too.
Indirect Costs
Repairs
Many things can go wrong with your car. Ranging from the replacement of a windscreen or tyre, right through to the replacement of a clutch or the entire engine and so the costs can vary a great deal. If your car breaks down on the side of the road, the cost of getting your car towed to a garage can also add to the final bill. It can be a good idea to get breakdown cover as part of your car insurance.
Interest payments
As mentioned, new cars are ridiculously expensive and yet there are so many of them we see on the road. Why is this? Dealerships make it possible for people on middle incomes to buy relatively high-end, new cars through finance deals such as Personal Contract Purchase (PCP). The interest rates for such finance deals vary but are typically between 5% to 10% APR.
Depreciation
Whilst certain car brands hold their value better than others, as the years go by, and the miles on the clock go up, cars invariably lose their value. Buyers are attracted to the idea of having “the latest model”, and many people don’t want to deal with the hassle of maintenance and repairs. For these reasons demand (and subsequently price) correlates with the age of a vehicle. To give an example, I purchased a car for £9,500 two years ago and it’s now valued at £5,500, meaning it’s depreciated in value by £2,000 per year!
Final Thoughts
Don’t rule out leasing
Given the cost of road tax, depreciation, repairs and finance interest payments, leasing a vehicle may prove to be a more financially viable option that one might expect. This is especially true if leasing a high MPG vehicle, such as this Volkswagen ID.3 for £310 per month. It’s perhaps the only financially viable option for those looking to drive a brand new car.
Is car finance making you poor?
The cost of servicing the monthly finance repayments on a vehicle should also be looked at from an opportunity cost perspective. For example, what might happen if you invested this same monthly sum into a fund such as the S&P 500 over the course of a few years? By our calculations, a £300 per month car repayment redirected towards an investment would (conservatively) net you a return of investment of £2.3k, over four years.
Can cars be a good investment?
Cars that go up in value: there are of course certain cars that people buy with the expectation that they will appreciate in value. These are typically rare, classic cars. Selecting a classic car that stands a good chance of increasing in value takes a certain level of expertise and it’s unlikely that same vehicle will be suited to driving daily.
Are there cheaper forms of transport?
If you’re on a tight budget, it may be better to consider other forms of transportation, such as public transportation or biking. However, if you need a car for work or other essential activities, it’s important to find a way to make it work financially.