Car financing and the real cost of owning a car
7 min read · Updated 2026-10-12 · MoneyCalc
The monthly payment is the number the showroom puts in front of you, and it is the smallest part of what a car costs. Over the years you will spend more on depreciation than on interest, and running costs will exceed the payment for most of the life of the vehicle. Buying well means looking at all of them together.
What the monthly payment actually contains
A car loan payment is an amortisation calculation: the price, minus the down payment and trade-in, plus sales tax, spread over the term at the agreed rate. The tax point catches people out — it is applied to the taxable amount in most states, which is the sale price less trade-in, but not always.
A longer term means a smaller monthly number and more total interest, sometimes much more. Stretching sixty months to reduce the payment frequently costs more overall than the higher payment on a shorter term would have.
Depreciation is the largest single cost
Every car loses value, and it loses most of it in the first few years. A typical figure is around fifteen to twenty per cent in year one, ten to fifteen per cent a year after that, slowing as the car gets older. It is the single biggest number in the total cost of ownership and the one most often ignored.
The practical implication is about holding period. If you buy new and sell after three years, you have absorbed three years of the steepest depreciation. Buying a two-year-old car, or keeping the one you have a year longer, removes the worst of it.
Running costs: insurance, fuel and maintenance
Insurance is usually the second biggest and the one most sensitive to your own history — a large part of the variation between drivers is record rather than risk. Fuel depends directly on how you drive and on the price at the pump, and fuel cost per mile is the figure that makes this concrete.
Maintenance follows a predictable schedule: tyres, brakes and services at defined intervals, with older vehicles becoming more expensive to keep. Budgeting a monthly figure for maintenance and repairs alongside the payment prevents an unexpected bill from feeling like an emergency.
What you can actually afford
The conventional guideline puts total car costs around ten to fifteen per cent of take-home income for a typical purchase, with housing costs kept separate. Work backwards from that rather than forwards from the price, because a payment you can just about service becomes unaffordable the first time anything goes wrong.
The affordability calculation also needs the insurance and fuel figures, which depend on where you live and how much you drive. Enter them as estimates, but enter them — a payment-only view of affordability is the most common reason people end up stretched.
Run your own numbers
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Common questions
How much should I put down on a car?
Ten to twenty per cent is typical. A larger deposit lowers the amount borrowed and often the rate, and reduces the total interest, though it ties up cash that could cover an emergency.
Is a longer loan term better?
It reduces the monthly payment and increases total interest, sometimes substantially. Choose the shortest term you can comfortably afford rather than the longest one that fits the payment.
What is the cheapest way to own a car?
Buy a one to three year old car, keep it longer, and maintain it carefully. The first year of depreciation is the most expensive and the least enjoyable to pay for.
MoneyCalc provides general information only and is not financial, investment, tax or legal advice. Figures are illustrative and depend on your own circumstances. See our full disclaimer.