What a car really costs: total ownership, not the sticker price
Shopping for a car by sticker price or monthly payment misses most of what it actually costs to own. Depreciation — what you paid minus what it's worth when you sell — is usually the single biggest line, and it never arrives as a bill, so it's the easiest one to forget. Add finance interest, insurance, fuel and servicing, and the cheaper car up front is not always the cheaper car to own.
The method
Depreciation = purchase price − expected resale value at the point you plan to sell. If financed, the finance cost is total of all payments − amount borrowed, where the payment itself comes from the standard loan formula: M = P × r / (1 − (1 + r)^−n) (P = amount borrowed, r = monthly rate, n = number of payments). A cash purchase has zero finance cost. Add depreciation, finance cost, insurance, fuel and servicing over the same holding period, for each vehicle, and compare the totals — not the price tag and not the monthly payment alone.
A worked example: cash versus financed
Two vehicles, compared over a 5-year hold.
Car A, bought outright for $28,000, expected to resell for $16,000 after 5 years. Insurance $1,200/year, fuel $1,800/year, servicing $600/year.
- Depreciation:
$28,000 − $16,000 = $12,000. - Finance cost:
$0(cash). - Insurance, fuel and servicing over 5 years:
($1,200 + $1,800 + $600) × 5 = $18,000. - Total:
$12,000 + $18,000 = $30,000—$6,000/year.
Car B, priced $22,000, financed in full at 6% over 60 months, expected to resell for $11,000 after 5 years. Insurance $1,000/year, fuel $2,000/year, servicing $500/year.
- Depreciation:
$22,000 − $11,000 = $11,000. - Monthly rate:
6 ÷ 12 ÷ 100 = 0.005. Payment:22,000 × 0.005 / (1 − 1.005^−60) ≈ $425.32. - Total paid:
$425.32 × 60 = $25,519.20. Finance cost:$25,519.20 − $22,000 = $3,519.20. - Insurance, fuel and servicing over 5 years:
($1,000 + $2,000 + $500) × 5 = $17,500. - Total:
$11,000 + $3,519.20 + $17,500 = $32,019.20—$6,403.84/year.
Car B is $6,000 cheaper to buy and has the lower purchase price, but it costs $2,019.20 more over the 5-year hold — about $404/year more — once financing, the higher fuel and insurance costs, and the smaller resale value are counted. The sticker price alone would have pointed the wrong way.
Why resale is the number to interrogate
Depreciation is the largest line in most comparisons and the least certain one — it depends on a resale estimate nobody can know for sure years in advance. Run the comparison twice, once with an optimistic resale figure and once with a pessimistic one, and see whether the ranking actually changes. If it does, the "cheaper" car is only cheaper under one guess about the future, which is worth knowing before you decide.
What this doesn't include
This is depreciation, finance cost, and the recurring costs you supply, added up over a holding period — nothing more. It doesn't include parking, tolls, breakdown cover, or the value of your own time, and it applies no tax rate. Every price, rate and resale figure here is a supplied example, not a benchmark; replace all of them with your own quotes before trusting the comparison.
Run your own numbers
The free Car Total Cost of Ownership tool compares up to four vehicles — petrol, diesel, electric or hybrid — on total cost, cost per year, per month and per mile, with a full itemized breakdown, entirely on your device.