Advice from Intellichoice: Ownership Cost Derivation (2012)

Depreciation

Our analysis shows, for each new vehicle, the projected annual and cumulative amount of depreciation over five years. Note that depreciation and resale value are two measures of the same element. A car’s purchase price minus depreciation equals a car’s resale value. By the same token, a car’s purchase price minus its resale value equals its depreciation. We project the future resale value of a car on the basis of several factors. We assume that the vehicle will be purchased at our Total Target Price, which is the total “out-the-door” price that the buyer can expect to pay. This price includes state and local taxes, destination fees and gas guzzler taxes if applicable. We then factor in the historical depreciation for that specific car model. We also evaluate secondary depreciation trends by brand, brand + class, overall classes and bodystyle. For example, to forecast the expected resale value of a current-year Nissan Maxima we consider the resale value history of previous Maximas, of other Nissan models, of other mid-size Nissans, of all mid-size cars in the same price class and of all sedans in the same price class.

When actual history is lacking for the exact model, we rely more on the secondary historical trends. To this statistical method we add our own economic, industry and model-specific analysis to determine the expected resale value for that particular vehicle. Depreciation is determined by a car’s resale value and can vary somewhat depending on where you’re selling the car, who you’re selling it to, optional equipment and the condition and mileage of the car. We assume values for the western U.S. (other regions of the country may be a small amount lower or higher), and that your car is sold to a private buyer. Furthermore, in our resale value/depreciation calculations we include the cost of some optional equipment. Additionally, we assume that the car is in good but not mint condition, and that you’ve driven it about 14,000 miles per year. 106A



Finance Costs

Our analysis shows the total interest charges you can expect to pay for the car over five years. Our financial projections are based on the latest economic information. We assume that you will put down 20% and take out a 60 month, 4.05% loan. Even if you pay cash for your car instead of borrowing money to pay for it, you should factor a finance cost into the cost of ownership. The reason for this is that if you didn’t invest the money in the car, it could be in the bank earning interest.



State Fees

We show the amount you can expect to pay in state taxes and registration fees over five years. Our state fee calculations are based on a sales-weighted average of all state fees, which includes the price, weight and class of the vehicle. Registration fees and taxes vary by state.



Insurance

Our insurance premiums are derived from information provided by an insurance rating service and from the insurance industry. We show, based on the assumed coverages and deductibles, how much you can expect to spend on insurance over five years. These figures let you easily compare the cost of insuring different cars in the same class and price range. Many personal, geographic and political factors determine your exact insurance premiums. We assume that you are between 30 and 65 years of age, have a good driving record, drive about 14,000 miles per year, and have no inexperienced drivers in your household. Insurance rates vary tremendously depending on where you live. You're probably wondering why the annual insurance premium shown in our analysis doesn't go up every year, especially since you may know that it generally costs less to insure a used car than a new car. It is almost always true that an older car will cost less to insure than a newer car of the same model. However, over time inflation makes the premium increase about as fast as the age of the car makes it decrease; as a result, the overall cost stays the same. Of all ownership costs, insurance is the most variable.



Fuel

IntelliChoice shows the amount you can expect to pay in fuel expenses over a five-year period. To determine fuel costs, we use EPA fuel mileage figures for both highway and city driving and assume a mix of 60% highway and 40% city. Prices are a six-month rolling average from the Energy Information Administration. For our 2012 annual analysis fuel costs are $3.57 per gallon for unleaded regular, $3.69 for unleaded midgrade, $3.82 for unleaded premium and $3.880 for diesel. Additionally, IntelliChoice assumes that fuel costs will increase by an annual inflation rate of 5.8% and that you will drive 14,000 miles per year. (Based on the Energy Information Administration U.S. six-month rolling average self-service prices.)



Maintenance

IntelliChoice shows the amount you can expect to pay for routine maintenance over five years. We include the following services in determining our maintenance cost figures:

Oil Changes

Inspection Services

Wheel Rotation

Wheel Alignment

Cooling System Maintenance

Spark Plugs

Fluid and Filters

Batteries

Timing Belt

Basic Brake Service

Air Conditioning Service

We assume that services take place at an authorized dealer location, using standard flat labor rates and times, and manufacturer’s suggested retail prices for parts where available. You can often get better prices than these, but we use them for consistency from car to car. We generally factor in a manufacturer-suggested mileage or time interval to perform a particular service. If the manufacturer does not specify, we apply our own intervals for particular services. We assume that most trips are longer than five miles (that is, “normal” driving conditions).



Repairs

Our analysis projects the amount you can expect to pay for repair expenses over five years or 70,000 miles. Repair costs take into account all manufacturer warranties. To determine these cost projections we take advantage of service contract pricing. Conceptually, a service contract is an insurance policy protecting against repair costs. In exchange for your "premium," the service contract provider agrees to pay for any needed repairs. To provide this service profitably the service contract provider has to make sure that, on average, the actual cost of repairs on the vehicle is less than the premium they charge. Therefore, we can expect that the average repair costs on a vehicle are less than the service contract price. The question is, how much lower? IntelliChoice first takes a flat amount off the service contract price to allow for a reasonable profit. Because independent service contract pricing does not take into account longer than standard warranties, IntelliChoice adjusts the pricing to account for varying warranties between manufacturers. For luxury brands the standard warranty is 4 years or 50,000 miles. For non-luxury brands the standard warranty is 3 years or 36,000 miles.

To determine the average service contract price, IntelliChoice utilizes pricing from several separate service contract providers. The plans used from all providers are for five years or at least 70,000 miles and are $0 deductible plans, meaning you pay nothing during the plan period other than the initial premium. Although the repair figure shown is based on service contract prices, the figure ranges from less to a lot less - depending on the manufacturer warranty - than what you would probably pay for a service contract. It is more reflective of the average repair costs for that vehicle. Remember that the repair costs we use are an average and that actual repair costs can have a very large range between similar vehicles. For example, take four Honda Accords with an average repair cost of $580. One may have $0 spent on repairs, two may have $300 spent on repairs, and the fourth may have $1,720 spent on repairs. The average is $580, but the range is $0 to $1,720.

It is important to separate hype from reality when considering how a vehicle's expected repair incidence will influence your decision on which car to buy. At one time there were vast differences in relative reliability among vehicles. Today, most any new vehicle you purchase is likely to be highly reliable. Other than minor state fees, the expected cost of repairs in the first five years will be less than any other cost associated with your new car. That’s right - and it's true even for the vehicles with the highest expected repair costs. The cost of depreciation, insurance, interest, fuel and maintenance will all be considerably higher than the cost of repairs. Therefore, you are likely to jump to the wrong economic conclusion if you purchase a car because you heard it is very reliable or avoid one because you heard it could turn out to be a lemon.

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