The cost of owning a car does not stop at the sticker price, or weekly trips to the gas station -- or even monthly car insurance payments. There are other associated costs, some that you incur daily and others that accumulate over time. Such costs include repairs, maintenance and depreciation.
Total cost of ownership (TCO) is the thorough financial estimate totaling the additional costs that come with owning a car; it includes all operating and maintenance costs until the time the vehicle dies.
Total cost of ownership models have been cited as far back as 1929 in a railway manual. TCO analysis was first applied broadly by the Gartner Group in the late 1980s to determine the cost of owning and deploying personal computers. Intellichoice was the first company in the automotive industry to leverage TCO analysis to determine vehicle ownership cost. This began in 1987 with printed annual guides for both cars and trucks. For years, Intellichoice was the only company that offered vehicle ownership cost data, performing the research in-house.
TCO is now used broadly as the ultimate cost metric of owning certain substantial items. For automotive vehicles, the components of TCO are: depreciation, interest on your loan (financing), taxes & state fees, insurance premiums, fuel costs, and maintenance & repairs. The weightiest factor of total cost of ownership is depreciation. It accounts for nearly 44% of TCO, in a five-year model. The second biggest factor is fuel cost, especially with gas prices escalating seemingly every day. A close third is insurance premiums. Together, these top three factors, depreciation, fuel, and insurance, determine around 80% of total cost of ownership.
Here is a full depiction of the components of TCO and how they relate to the full cost of owning a vehicle.
Insurance cost, however, is the most variable factor within total cost of ownership. And, unfortunately for TCO, insurance costs have been steadily rising. In 2012, they rose 3.4%, according to the Insurance Institute of Highway Safety. Insurance costs can dramatically alter the ownership cost of a seemingly affordable car. This is because insurance premiums are based on personal histories, on top of state laws and regulations setting the price ranges. No two people with the same car will pay the exact same in insurance premiums.
This curveball has rankled TCO appraisers for years. According to Eric Anderson, a representative for Intellichoice, “Insurance is the hardest for us to assess accurately because price is determined by factors other than vehicle such as: carrier, coverage, personal history, and geography.”
Knowing the total cost of ownership, or even taking the time to look at a five-year model, can help you make better decisions when shopping for a vehicle. When used in financial analysis, TCO provides a cost basis for determining the total economic value of an investment. This can be extremely helpful if you are torn between two cars and/or if you’re not even sure you can afford to own a car.
Who uses TCO models? Online car information websites such as Intellichoice, Kelley Blue Book, Edmunds, Cars.com and other large portals. These sites use the model as a way to offer consumers a simple way to check all the financial factors before purchasing a car.
Using the CoverHound platform along with the TCO model, you could see exactly how insurance affects the bottom line. This could be extremely helpful to scrutinize before purchasing a vehicle. You will be able to decipher what percentage the depreciation, fuel, and insurance costs will be on your car over a five year period. The more information you have, the better decision you can make.
