Escalating Finance Costs Drive 24% Spike in TCO
AAA analysts say bigger price tags and higher interest rates have conspired to raise American new-car buyers’ average annual total cost of ownership to $9,282, an all-time high and a 24% year-over-year increase.
Depreciation remains the No. 1 contributor to new-vehicle buyers’ total cost of ownership, but finance costs grew at a higher rate than any other factor over the past 12 months, according to AAA.
Photo by fo.ol via Flickr
ORLANDO, Fla. — Finance costs on new car purchases have jumped 24% in 2019, according to new AAA research, pushing the average annual cost of vehicle ownership to $9,282, or $773.50 a month. That’s the highest cost associated with new vehicle ownership since AAA began tracking expenses in 1950 and a reminder that the true costs of owning a vehicle extend far beyond maintenance and fuel.
“Finance costs accounted for more than 40% of the total increase in average vehicle ownership costs,” said John Nielsen, AAA’s managing director for Automotive Engineering & Repair, in a press release. “AAA found finance charges rose more sharply in the last 12 months than any major expense associated with owning a vehicle.”
Read: Prime Buyers Flock to Used Vehicles in Q2 Report
The new figures come from AAA’s Your Driving Costs report, which reviews 45 vehicles in nine categories to determine the average annual operating and ownership costs of each. AAA focuses on top-selling, mid-priced models and compares them across six expense categories, including finance charges as well as service costs, insurance, and depreciation.
The spike in finance charges — which rose from $744 to $920 — was fueled by rising federal interest rates and higher vehicle prices.
Depreciation remains the single biggest cost of ownership, accounting for 36% of the average annual cost. It slowed a bit this year, with vehicles included in the study losing an average of $3,334 a year, up $45 — or 1.4% — from last year. In 2018, depreciation rose by $117, or 3.7%. In two vehicle classes this year — small and medium sedans — depreciation costs actually declined.
The spike in finance charges — which rose from $744 to $920, a nearly $200 increase — was fueled by rising federal interest rates and higher vehicle prices. It comes as 72-month car loans have become increasingly common — meaning car buyers are paying more, and longer, for vehicles that lose value the moment they’re sold.
AAA found that, on average, every 12 months added to the life of a loan adds nearly $1,000 in total finance charges.
“Smaller monthly payments may be tempting to potential buyers, but they can add big costs in the long run,” Nielsen said.
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