Tuesday, June 10, 2008

Gas Is Just One Slice of the Pie

The average price of gas broke $4 a gallon over the weekend, which means that over the past year the price of gas has risen 29 percent. However, when you look at all the other ownership costs of a car, gas may not be as big of a factor as you think.

The fuel economy of the average car in the US is about 25 miles a gallon. If you drive 15,000 miles a year, your gas bill will be about $2400 annually. At last year’s gas prices, it would have only cost you $1860 to go the same distance. That $540 difference is certainly painful, but what happens when we compare it to some of the other car-related expenses we pay: loan interest, depreciation, and insurance?

Car Loan Interest

According to the Federal Reserve’s most recent Report on Consumer Credit, the average value of a new car loan was $28,174 during the first three months of 2008 with an average interest rate of 4.85%. For a five year loan, that corresponds to a monthly payment of nearly $530 ($6360 annually). In the first year of the loan, about $1250 goes toward interest expenses, and the rest pays down the principal. Over the life of the loan, interest expenses steadily decrease, falling by about $300 each year. Nonetheless, during the first one to three years of the loan, interest expenses cost approximately one half to one third as much as annual fuel costs (assuming $4 a gallon gas).


Most of us already know that car depreciation can cost thousands of dollars a year. A new car can depreciate 50 percent or more in the first five years of ownership, with the biggest drop coming in the first year. Even if we make conservative estimates on depreciation of 20 percent in the first year and 10 percent after that, the total depreciation over the first five years is almost 48 percent. At a 20 percent rate of depreciation in its first year, the average new car would drop more than $5600 in value — more than twice the cost of fuel for the year.


The national average for car insurance is about $830 per year. This is about one third the cost of fuel for the average car. Of course, this number can increase sharply depending on location, type of car, age of the driver, and driving history.

Cost Comparison

According to Consumer Reports, depreciation, fuel, interest, and insurance are the major costs of owning a car. Their report, however, only looks at total ownership costs over five years, not costs for each year individually. In addition, Consumer Reports estimates gas at $3 a gallon instead of $4. For simplicity, our comparison ignores tax and maintenance, since they account for less than 10% of ownership costs.

In the first year of owning a new car, gas is less than a quarter of the cost of ownership, but by year five, it accounts for nearly half of ownership costs. Regardless, if fuel only accounts for about 50% of ownership costs on a car that is several years old, then a 30 percent increase in the price of fuel would only increase the cost of car ownership by 15 percent.

At least that offers some consolation the next time you fill up your tank.

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