Car Buying Articles

True Cost to Own® (TCO®)

Revealing the Hidden Costs of Car Ownership


  • Car, Keys and Cash Picture

    Car, Keys and Cash Picture

    Knowing a car's TCO will show you the hidden costs of car ownership. | May 12, 2011

3 Photos

You've narrowed your choices to two new cars, but you can't seem to decide which one is really the better deal.

The purchase price of each vehicle is nearly the same. The features are similar, and you like the way they both look. Still, a nagging feeling tells you that there must be a meaningful difference between them, even if it's not obvious during the purchase process.

Your intuition is right on the money. And now there is a tool that reveals those hidden costs — all of the costs — associated with buying, owning and operating a car over a five-year period. "True Cost to Own®" (TCO®) is a research tool provided by Edmunds.com.

To show you how it works, let's look at two midsize family sedans. The purchase price of one is $21,500 and the other is $22,400. You like each one equally, so your inclination is to say, "I'll just buy the cheaper one." After all, that would save you almost $1,000.

However, the purchase price is only the tip of the iceberg. What you may find by reviewing Edmunds' TCO® figures is that, over five years, the cheaper car to buy is actually more expensive to own. Over five years, it will cost $33,438 to drive the car with the lower initial price. The more expensive car will cost $30,140 to drive over five years. The car with the lower purchase price costs 45 cents per mile to drive while the more expensive vehicle costs 40 cents per mile to drive (assuming you drive 15,000 miles a year).

At this point you are probably wondering how Edmunds comes up with these figures. There are eight components of TCO®: depreciation, interest on financing, taxes and fees, insurance premiums, fuel, maintenance, repairs and any federal tax credit that may be available. The costs are researched and placed into a series of proprietary algorithms developed by Edmunds' statisticians. The result is an estimated total ownership cost for a five-year period. This information is presented on a single page on Edmunds.com for each vehicle. The information is standardized, so expenses for different vehicles can be accurately compared.

TCO® reveals a complete picture of ownership-related expenses that's designed to help consumers make the right choice when purchasing a vehicle. Some buyers might find that they can afford to buy a vehicle, but they can't afford to own it. Understanding a vehicle's TCO® is extremely important to a person on a fixed budget.

An Edmunds analyst who participated in the development of TCO® used an analogy to explain its value: "You are choosing between two shirts and you finally decide to buy the one that is $20 less. But later, you discover that it has to be dry-cleaned using a special process. Each time you get it dry-cleaned, it costs $4, plus the hassle of taking it to the cleaners. After five washes, the savings on the shirt you bought have disappeared, and you probably wish you had bought the more expensive one in the first place."

TCO® might confirm something that you already know and help you solidify your decision on which car to buy. For example, it may be common knowledge that a Honda Civic is a good value for the money. With TCO®, you can confirm that assessment — or see of things have changed.

You can reach the TCO® page via two paths:

  • Click on the TCO® link in the "new cars" drop-down tab on the home page. Enter the vehicle's year, make, model and style.
  • Go to the Vehicle Detail Page for a specific vehicle and look for the True Cost to Own® figure, underneath the "Get Your Expected Price" link.

The TCO® page breaks information down into the following two sections.

1. TCO® Summary Section
The summary shows the results of the TCO® calculations. It gives you two figures:

  • The True Cost to Own® figure. This is all of the ownership and operation costs for five years.
  • The Total Cash Price for new cars is the sum of a vehicle's True Market Value® (TMV®) price, along with typically equipped options, destination charge, base tax for the state and any applicable luxury or gas-guzzler taxes. For used vehicles, the total cash price shown is the sum of the vehicle's Private Party TMV price in "clean" condition, plus typically equipped options, and base tax and fees in your state.

2. Five-Year Details
The five-year details section gives a breakdown of how the vehicle's expenses change over the five-year period. It shows the car's depreciation or its decline in value. This would be important in a case in which there was a sudden drop-off in value after, say, the third year. Knowing this, the owner could sell the car at that time and avoid the subsequent loss of value to his or her vehicle.

The other parts of the breakdown show the typical expenses related to the purchase of this vehicle, including such things as fuel, insurance, maintenance and repairs. These are costs that people sometimes overlook when they're buying a car. Seeing them listed, and then totaled, can help you plan for this large purchase.

We highly recommend you consult TCO® before purchasing a car. It makes ownership costs transparent and gives a breakdown year by year. In this regard, TCO® may influence how long a person owns the vehicle, the number of years they choose to finance the vehicle and other decisions. As one analyst put it, "TCO lets consumers see the depth of the water before jumping in the deep end."

With TCO®, you get a snapshot of the car's costs over time. You will see the big picture — and not just today's price tag.

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By codeb55
on 03/03/11
10:29 AM PST

So what if you always typically own your vehicles for 10-12 years? Yes, the resale value goes down, but those loan costs can be spread across the entire length of time and thus makes the TCO lower?

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