Types of Costs

Types of Costs


Some owners may think of costs only in terms of outlays
for fuel, oil, tires and tolls. A more careful examination
shows that some costs occur whether or not the vehicle is
driven, while others are directly related to the amount of
travel. The travel-related group is generally referred to as
operating costs, and the other group as ownership costs.
Analysts often differ on the costs that should be included in
each category. The following defines the terms as they relate
to this study.

Ownership Costs: Ownership costs include depreciation,
finance charges, insurance, registration and titling fees, and
any taxes applied to these items. No matter how little a
vehicle is driven, the majority of the cost of each of these
items is incurred.

1. Depreciation is the loss of value of the vehicle during
its lifetime due to passage of time, its mechanical and
physical condition, and the number of miles it is driven.

National vehicle dealer groups issue vehicle value books
for different regions of the country, usually on a quarterly
basis. These values are determined by a survey of vehicle
selling prices by make and model year in each geographic area.
The values are based on normal travel, so lower or higher
odometer readings will be reflected as higher or lower
remaining vehicle values, respectively. The depreciation costs
in this report represent the projected decline in real value
over time, obtained from such reports and adjusted to exclude
the effect of inflation and the difference between prices
charged by dealers and those obtainable by individuals when
they sell their vehicle.

Depreciation is the single greatest cost of owning and
operating most passenger vehicles; however, the cost of
insurance, gas and maintenance are also significant. In the
majority of cases, the age of the vehicle is the most important
factor in determining resale or trade-in value. Other
influences are mileage, brand popularity, body style, size,
color, and the state of the used-vehicle market.

Typically, between 25 and 45 percent of all depreciation
occurs in the first year of ownership. Much of this occurs as
soon as the vehicle is purchased (an individual cannot get as
much for a car as a dealer can), and there is additional
depreciation when the next year's models become available.
Purchasers of used vehicles also will encounter significant
depreciation during their first year of ownership. The tables
represent the case in which a vehicle is owned by the same
family for all twelve years, so the extra depreciation that
occurs in the first year of ownership of a used vehicle is not
shown. For new cars, the percentage of depreciation occurring
in the first year is highest for compact pickups and subcompact
automobiles and lowest for minivans.

Depreciation rates drop sharply in the second year (to
7-10 percent of the purchase price) and much more gradually
after that. Since vehicles generally are driven less as they
age, depreciation cost declines more slowly when it is
expressed on a per-mile basis than as an annual cost. For a
$13,715 intermediate-sized car, depreciation in the first year
is about $4,350. or 33.7 cents per mile; while in the second
year it is about $1,270, or 10.1 cents per mile, and in the
12th year it is $430, or 5.3 cents per mile. If the car is kept
for 12 years, overall depreciation averages 10.7 cents per
mile.

2. Finance Charges are based on a typical interest rate of
10.5 percent, a 4-year financing term and a 25 percent down
payment. However, since a number of options are available,
methods are provided so that readers can approximate their own
costs with relative ease. Most vehicle buyers either pay
interest on money they borrow to buy their vehicles, or they
forego interest they would have earned if they elect to use
savings or other investments to pay for the vehicles outright.

Lending institutions and vehicle dealerships have various
financing plans available. Institutions may differ as to the
portion of the vehicle cost they are willing to finance, the
rate of interest charged, the length of the loan term. These
conditions may depend upon whether the vehicle is new or old.
Dealers are sometimes willing to provide financing at below
market interest rates, but recipients of such subsidized loans
actually pay for them by foregoing a cash payment from the
dealer or otherwise paying a higher purchase price for their
vehicle.

A more careful examination shows that some costs occur
whether or not the vehicle is driven (ownership costs), while
others are directly related to the amount of travel (operating
costs).

Interest charged should be considered in the cost of
owning a vehicle. The lender will provide the total interest
charges, which may be divided by the accumulated miles of
travel for the length of the loan. For a 4-year loan, total
interest charges would be divided by 49,700 miles. The
computation will give the cost-per-mile figure that should be
added to each of the 4-year totals shown in the tables.

The computation of interest lost on savings is more
difficult. The cash payment for the purchase of a vehicle, the
type of savings plan, the current rate of interest, and the
period of time for monthly deposits to equal the cash payment,
will vary greatly among purchasers. Savings institutions will
provide the amount of interest that could be earned by the
deposit of an amount equal to the cash payment for the selected
period of time and the amount of interest that can be earned if
equal monthly amounts are paid into the savings account for the
same period. The difference between these two interest amounts
is the interest lost by paying cash for the purchase of a
vehicle.

Alternative methods of financing a new vehicle purchase
can make important cost difference; and merits of different
plans should be weighed carefully before a particular plan is
selected.

If $12.000 is needed to purchase a vehicle and four years
(48 months) is selected as the period of time needed to save
this amount, the monthly payment into savings would be $250
($12,000 divided by 48). The difference in interest earned by
these payments and the interest earned on $12,000 on deposit
for four years is the interest lost by paying cash. At five
percent interest compounded quarterly, $12,000 on deposit for
four years would earn $2,638 in interest. This would be lost if
the money were withdrawn from savings to pay cash for a car. To
replace the $12,000 in savings over four years, the purchaser
would have to deposit $250 at the end of each month. These
deposits would earn $1,248 in interest. The difference between
these two interest amounts ($2,638 - $1,248 = $1,390) would be
the interest cost of paying for the automobile purchase from
savings.


Alternative methods of financing a new vehicle purchase
can make important cost differences; and merits of different
plans should be weighed carefully before a particular plan is
selected. Table 10 shows the cost per thousand dollars for
financing a vehicle purchase through a loan and financing
through a savings withdrawal at various interest rates.

3. Insurance Costs are determined by vehicle type, the
amount and type of coverage selected, the purpose for which the
vehicle is used, the operator's driving record, and the
location in which it is garaged. Insurance rates may also be
affected by unusually high or low annual mileage driven.

Automobiles are continuously exposed to the possibility of
damage, whether on the highway or parked. The large number of
vehicles on the roads and streets and in parking lots make each
vehicle susceptible to accident involvement. The cost of
repairing even minor damage has continued to increase and is
reflected in the insurance rates. For comparable coverages, the
insurance rates used for automobiles in this study average
about 50 percent more than they did in 1984 (though the rates
for full-sized vans are almost unchanged).

The insurance coverage in this study for all vehicles
except full-sized vans includes $20,000/$40,000 bodily injury,
$10,000 property damage, $2,500 personal injury protection, and
$20,000/$40,000/$10,000 uninsured motorist coverage. This
coverage is the minimum required by law in the State of
Maryland and according to State officials is the most common
coverage purchased. For full-sized vans, the insurance coverage
includes $300,000 single limit liability, $2,500 personal
injury protection, and $50,000 uninsured motorist coverage. The
higher coverage for full-sized vans reflects an assumption that
they will be used primarily for van-pool commuting. Coverage
reflects the cost for a policy where the driver has no moving
violations or accidents in the last 3 years, no youthful
drivers are covered and there is no multi-vehicle discount.
Coverage for all vehicles also includes $100 deductible
comprehensive coverage and $250 deductible collision coverage.
Collision coverage is assumed to be dropped after the first 5
years. The deductibles are higher than those used in 1984,
reflecting the effects of inflation and a trend to controlling
premiums by increasing deductibles. There is a considerable
saving to the insurance company when a large number of small
claims do not have to be processed. The saving is passed on to
the insured in lower rates.

All coverages with the exception of collision are assumed
to remain in effect for the full 12-year period covered. Some
owners of older vehicles do not obtain comprehensive or
collision coverage, either because they choose to self-insure
or because their insurance company does not offer these
coverages on older vehicles.

4. Registration, Title and Inspection Fees are fees
collected by the State and some local subdivisions in which the
vehicle is registered. All States charge a fee for
registration, and some charge an additional fee for obtaining
title to a vehicle when it is first purchased (whether new or
old). Also, some States charge fees for emissions or safety
inspections performed by a State agency or a State contractor.
The fees shown in Tables 2 through 9 consist of an annual
registration fee varying with vehicle weight, a biennial $8.50
emissions inspection fee, and a $12 titling fee applied when
the vehicle changes ownership (assumed to occur only in Year
1).

5. Vehicle Taxes consist of sales taxes and personal
property taxes levied on the value of the vehicle by some
States and local subdivisions as well as the Federal
"gasguzzler" tax and the Federal luxury tax levied on the
portion of a new-car sales price that exceeds $30,000. Tables 2
through 9 show the effect of a five percent "excise titling
tax" applied when the vehicle changes ownership (assumed to
occur only in Year 1 ). None of the vehicles selected for this
study are subject to either of the Federal taxes.

Operating Costs: Operating costs include scheduled
maintenance and unscheduled repairs and maintenance, fuel, oil,
tires, parking, tolls, and the taxes applied to these items.
The majority of each of these costs are a function of vehicle
usage.

1. Scheduled Maintenance includes the services shown in
the owner's manual. Generally, the suggested maintenance
intervals are expressed in miles driven or period of time
owned. The services include maintenance of the cooling system,
oil changes, safety checks, tuneups, and lubrication. When the
owner's manual recommends that an item (e.g., brakes) be
checked for wear, the cost of the labor to make such an
inspection is considered scheduled maintenance. If a repair is
found to be necessary, the cost of the replacement parts and
the labor to install them are included in nonscheduled repairs.

2. Unscheduled Repairs and Maintenance shown in this
report were estimated by taking data on total costs for repairs
and maintenance (from the 1989 Consumer Expenditure Survey),
adjusting for differences across vehicle classes, and
subtracting the cost of scheduled repairs and maintenance. The
estimated costs exclude the cost of any repairs that are done
by a dealer when a vehicle is traded but that would have to be
performed by the owner if the vehicle is kept for the full 12
years.

About 65 percent of repair and maintenance costs are for
labor and 35 percent are for parts. A Baltimore, Maryland labor
rate of $48.67 per hour was used. Both the labor rate and the
prices for parts include markups that cover the cost of
buildings, equipment, supervision and other costs of doing
business. Actual labor costs for maintenance and repairs vary
widely. This factor should be taken into account in using the
results of the study.

Many dealers offer an optional extended warranty, usually
5 years/50,000 miles, which, if chosen by the vehicle
purchaser, would have a bearing on costs for major unscheduled
repairs. The optional extended warranty is not included in this
study.

Some owners of older vehicles do not obtain comprehensive
or collision coverage, either because they choose to self-
insure or because their insurance company does not offer these
coverages on older vehicles.

Some maintenance jobs, such as replacement of radiator
hoses or fan belts, are relatively easy and present the vehicle
owner an opportunity to save by performing them
himself/herself. Many vehicle owners, however, opt to pay
professional mechanics for these services.

3. Fuel is a major cost item for vehicles of all sizes.
For the gasoline-engine vehicles used in this study, the
difference in fuel costs between the 1991 full-sized car and
the subcompact over the lives of the vehicles is $2,690
(including taxes). As shown in Tables 2 and 5 respectively,
over the first 3 years, gasoline will cost $791 more for the
full-sized car than for the subcompact. This comparison is more
meaningful when considering the full-sized car provides only
about 35 percent more interior space for the nearly 50 percent
higher fuel cost.

A cost of $1.196 per gallon, including State and Federal
taxes, for unleaded regular gasoline was used for this study.
This represents an 80/20 mix of self-service and full-service
prices for the study area (in line with the average mix of
self-service and full-service purchases). Full-service costs in
the Baltimore area are about 28 cents per gallon higher than
the price used in this study and self-service costs are about 7
cents per gallon lower (though the difference averages only
about 22 cents per gallon nationally).

Fuel is a major cost item for vehicle of all sizes. For
the gasoline-engine vehicle used in this study, the difference
in fuel costs between the 1991 fullsized car and the subcompact
over the lives of the vehicles is $2,690 (including taxes).

The gasoline costs shown in Tables 2 through 9 can be
adjusted to reflect changes in the price of gasoline. For each
one cent increase in the cost of a gallon of gasoline, the
total cost per mile for the full-sized car would increase
0.0558 cents. This is computed by dividing the total cost per
mile of gasoline (4.85 cents) plus State and Federal taxes
(1.03 cents and 0.79 cents) by $1.196, the cost per gallon used
in this study. Table 11 show the gasoline cost per mile for
each class of vehicles for a selected range of gasoline prices.

4. Oil Costs for a new or relatively new vehicle are
mainly dependent on the car manufacturer's instructions for oil
changes, because little, if any, oil is burned by these
vehicles. The oil change interval is 7,500 miles for all five
study vehicles. The subcompact cars and compact pickups have an
average 4.7 quart capacity, the full-sized pickups and
full-sized vans have an average 5.5 quart capacity, and all
other vehicles have a 5-quart capacity.

5. Tires receive 514,000 miles of wear when an automobile
is driven 128,500 miles. All vehicles have radial fires and all
replacement tires are assumed to be radial. The number of
replacement tires is based on a life expectancy of 40,000 miles
for radial tires. Tables 2 through 9 presume that tires are
replaced in Years 4, 7 and 12 (i.e., at odometer readings of
40,000, 80,000 and 120,000) causing small spikes in the
operating cost figures for those three years. In practice, the
timing of these three spikes will depend upon the
tire-replacement schedule actually followed, rather than the
one assumed in this study.

6. Parking and Tolls include metered curb parking, fees
charged in parking lots, and toll charges for using private or
public highways, tunnels, and bridges.

7. Taxes on fuel and oil are the primary component of
operating cost taxes. These taxes are paid on a per-gallon
basis. The Federal gasoline tax is 14.1 cents per gallon. The
Maryland gasoline tax is 18.5 cents.