TCO: Total cost of ownership and why it matters
Buying a car is the second-most expensive thing a human will ever purchase after a house, so it's vital to make sure you can cover all the costs associated with it.
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Buying a car is one of the biggest financial decisions we make, but the price tag is only one part of the overall cost of having a car in your life.
It’s essential to consider how much a vehicle costs to run and keep on the road too.
This is what we call the ‘total cost of ownership’, or ‘TCO’ for short.
Car running costs
Fuel and insurance are the two most obvious running costs, but vehicle depreciation (the difference between a car’s value when you buy it and when you come to sell it) is the biggest cost of owning a car, but also a largely hidden one.
In the UK, we swap cars on average every 3-4 years. Some new cars can depreciate by as much 15-35% in the first year, and will often lose 50% or more over three years.
For example, if you take these two notional cars at the cheaper end of the market, you can see that Car B is initially cheaper by £2,000 but actually costs more over three years than Car A.
Car A – higher purchase price
List price: £9,995
Depreciation: £3,805
Fuel: £4,726
Insurance: £2,004
Servicing, maintenance, repairs: £735
Road tax: £500
Registration fee: £55
Total running cost over three years: £8,020
Total cost of ownership over three years: £11,825
Car B – lower purchase price
List price: £8,999
Depreciation: £6,159
Fuel: £2,950
Insurance: £1,764
Servicing, maintenance, repairs: £711
Road tax: £400
Registration fee: £55
Total running cost over three years: £5,880
Total cost of ownership over three years: £12,039
Running costs vs cost of ownership
While the more-expensive Car A also has higher running costs, it depreciates less.
Meanwhile, Car B, which is cheaper to buy and to run, depreciates a lot more.
In fact, it depreciates so much more that the initial £2,000 saving is completely outweighed by the depreciation over three years.
On that basis, if you could afford it, you’d be better off with Car A.
Which new cars depreciate fastest and slowest?
Looking at depreciation alone, it's clear that the value of a new car can fall at an alarming rate, but some perform worse than others.
For example, if you take a supercar such as a Ferrari or Lamborghini then you are more likely to face higher depreciation in the first few years than you would, say, a brand-new Fiat Panda.
This is because the car's purchase price is so much higher and therefore has more to lose – aided by mileage, general usage and the state of the used car market.
How can I minimise my car’s depreciation and maximise its resale value?
1) Keep the miles down
In order to maintain the value of your car, try not to exceed an average mileage of more than 10,000 – the higher the mileage, the less your car is worth, usually.
Covering less miles can also help you save money on insurance - follow our tips to get the cheapest insurance deals
2) Check the V5C
'One careful owner' – the fewer keepers on a car’s V5C registration, or logbook, the better. This is because it's likely the car has had a more stable history and will have, in theory, been kept in better health.
3) Does it have a full service history?
A full service history gives potential buyers peace of mind. The service book should have the right stamps and receipts in line with the manufacturer’s recommendations.
4) What's the state of your car's warranty?
The longer the warranty left on a car, the more attractive it is as a used car buy. Most manufacturers have a standard three years, but some offer a generous five or seven.
5) What safety features does your car have?
Advanced safety tech such as Autonomous Emergency Braking (AEB) or Forward Collision Warning (FCW) features makes a car more desirable for an increasing amount of used car buyers.
6) Black is the new orange... for some
Colours can affect a car’s resale value because some buyers are put off by divisive shades, so stick to popular colours like silver… and avoid pink!
7) How new is your car and what options does it have?
If a model has been replaced or had a face-lift from the manufacturer during your three years of ownership, your car will depreciate more. Try to choose a new car that's towards the beginning of its production run – but we understand this isn't always easy.
It’s also worth spending a little extra on the right optional extras such as built-in sat-nav and air conditioning, because these make your car more attractive as a used car.
8) Avoid modifications and keep it clean
Keep it in tip-top shape. Damage to the bodywork, alloy wheels and interior reduces a car’s value. Even the odour left by cigarettes and dogs is another turn-off for most buyers.
Cars should also be kept as close to their standard specification as possible, so refrain from changing the alloy wheels and seats, or adding a body kit.
Cars featuring original parts are easier to sell on. And if you do wish to modify your car, just make sure to revert it to stock before selling it on – this way you've got the best possible chance of making that deal.
What is the total cost of owning a used car?
You don’t just need to worry about the total cost of ownership with new cars. You should also consider it when buying second-hand.
The good news is that depreciation is not such a big concern because it’s likely to have experienced the worst of it during the first three years of its life, but it will still apply to some degree.
Nevertheless, on a used car, it’s running costs that will have the biggest impact. It's often difficult to know what running costs to expect when buying a used car, but we'd recommend either speaking to the previous owner or joining an owner's club forum to learn more about the estimated yearly running costs.
If you want to see how much you can pick up a used car for, use our car finance calculator.
Alternatively, if you're not sure which car to choose, try out our 'Help Me Choose' function.