When you’re in the market to compare vehicles, focusing solely on the sticker price can be misleading. The initial cost is just the tip of the iceberg when it comes to vehicle ownership. To truly compare vehicles and make an informed decision, you need to consider the True Cost to Own (TCO). Edmunds’ True Cost to Own tool is designed to provide a comprehensive view of vehicle expenses over a five-year period, going beyond the initial price tag to reveal the long-term financial implications.
Understanding True Cost to Own (TCO)
True Cost to Own is a methodology that calculates the total expenses associated with owning a vehicle for five years. It moves beyond the purchase price to include all the significant costs that accumulate over time. This allows you to compare vehicles on a level playing field, considering not just what you pay upfront, but what you’ll pay throughout your ownership experience. For anyone looking to compare vehicles effectively, understanding TCO is paramount.
Edmunds’ TCO calculator is a valuable resource for anyone looking to compare vehicles because it provides a detailed breakdown of these costs, making it easier to understand the financial implications of choosing one vehicle over another.
Edmunds TCO Calculation Methodology: A Deep Dive
Edmunds employs a robust and transparent methodology to calculate the True Cost to Own. The calculation is based on a set of standardized assumptions to ensure fair comparisons across different makes and models. Here are the key assumptions and components that Edmunds uses when you compare vehicles using their TCO tool:
Key Assumptions in TCO Calculation
To provide consistent and comparable data when you compare vehicles, Edmunds uses the following assumptions in their TCO calculations:
- Ownership Period: Costs are projected over a 5-year period. This timeframe provides a realistic long-term view of vehicle ownership.
- Annual Mileage: It’s assumed that the vehicle will be driven 15,000 miles per year. This is a common average annual mileage in the US, allowing for consistent comparison.
- Financing: The calculation assumes traditional financing with a loan, not leasing, to reflect typical purchase scenarios.
- Credit Rating: An above-average credit rating is assumed to determine the finance interest rate, reflecting generally favorable financing terms.
- Down Payment: A 10% down payment is assumed at the time of purchase.
- Loan Term: The loan term is set at 60 months (5 years), aligning with the ownership period.
These standardized assumptions allow Edmunds to create a level playing field when you compare vehicles using TCO. It’s important to remember that these are averages, and your personal circumstances may vary.
Components of Edmunds True Cost to Own Calculation
When you compare vehicles using Edmunds, the TCO calculation incorporates seven key cost categories, providing a holistic view of vehicle expenses:
1. Depreciation: The Value Erosion
Depreciation is the decline in a vehicle’s value from its purchase price to its estimated resale value. This is often the most significant cost of ownership. Edmunds calculates depreciation by taking the vehicle’s Total Cash Price (market value plus typical options, taxes, and fees, minus rebates) and subtracting the estimated resale value after five years. The resale value is estimated assuming the vehicle is in “clean” condition, driven 15,000 miles per year, and sold privately. When you compare vehicles, understanding depreciation is crucial as it can vary significantly between models.
2. Insurance: Protecting Your Investment
Insurance costs are estimated as the average annual premium in your state. Edmunds uses data from a major national insurer, considering vehicle make, model, year, and body type. While this provides a good benchmark for comparison when you compare vehicles, remember that your personal insurance rate will depend on factors like your age, driving history, credit score, and location.
3. Financing: The Cost of Borrowing
Financing cost represents the interest expense on a loan for the vehicle’s Total Cash Price, assuming a 10% down payment and a 60-month loan term. Edmunds uses prevailing interest rates for consumers with above-average credit scores in your region. Even if you pay cash, this financing cost reflects the opportunity cost – the potential earnings you could have made if you invested the purchase price instead of buying the vehicle. This is an important factor to consider when you compare vehicles, even if you are not planning to finance.
4. Taxes & Fees: Government Levies
Taxes & Fees include base sales (or use) taxes, license and registration fees, and any applicable gas-guzzler tax in your state. These are often a percentage of the purchase price and generally decrease as the vehicle ages. Edmunds’ calculation includes average local and county taxes, providing a comprehensive estimate for comparison when you compare vehicles across different states.
5. Fuel: The Cost of Motion
Fuel expenses are calculated based on revised EPA mileage ratings, assuming a mix of 45% highway and 55% city driving. Edmunds uses the current one-year moving average of fuel prices in your state, factoring in the type of fuel recommended or required by the manufacturer (regular, premium, or diesel). Fuel costs are a significant variable when you compare vehicles, especially with fluctuating gas prices and differences in fuel efficiency.
6. Maintenance: Keeping it Running Smoothly
Maintenance costs cover both scheduled and unscheduled maintenance. Scheduled maintenance includes factory-recommended services at specific intervals. Unscheduled maintenance covers items like wheel alignments, battery replacement, brakes, tires, and other wear-and-tear parts. Edmunds partners with The Tire Rack Inc. for tire replacement cost estimates. Maintenance costs are a crucial aspect to consider when you compare vehicles, as some vehicles are known for higher maintenance needs than others.
7. Repairs: Addressing the Unexpected
Repairs are the estimated costs for repairs not covered by the manufacturer’s warranty over the five-year ownership period. Edmunds estimates this expense based on the cost of a typical “zero deductible” extended warranty, subtracting the warranty provider’s overhead and profit. This provides a realistic estimate of potential out-of-pocket repair costs when you compare vehicles and think about long-term reliability.
8. Federal Tax Credits: Incentives for Efficiency (For Electric Vehicles)
Federal Tax Credits may apply, particularly for electric vehicles, under the Energy Policy Act of 2005. These credits directly reduce your federal tax liability. Edmunds factors in these credits, including phase-out rules, to accurately reflect the TCO of eligible vehicles. This is a significant advantage to consider when you compare vehicles, especially when considering electric or hybrid options.
Why Use Edmunds to Compare Vehicle Ownership Costs?
Edmunds’ True Cost to Own tool provides a transparent, data-driven approach to compare vehicles beyond their initial price. By considering all these factors, Edmunds empowers you to:
- Make Informed Decisions: Understand the full financial picture of vehicle ownership.
- Compare Vehicles Accurately: Go beyond sticker price and compare long-term expenses.
- Budget Effectively: Plan for all vehicle-related costs over five years.
- Save Money: Choose vehicles that are more cost-effective in the long run.
When you Compare Vehicles Edmunds True Cost to Own tool is an invaluable resource. It helps you move beyond the initial excitement of a new car purchase and make a financially sound decision based on the complete picture of vehicle ownership costs. Start comparing vehicles on Edmunds today to find the most cost-effective option for your needs and budget.
