Mash Your Motoring Bills!

The cost of running a car has risen by almost £540 in the past year, so here are lots of ways to cut your cruising costs.

According to the RAC, the cost of running a car has increased by roughly £540 over the past twelve months, hitting thirty million drivers across the UK.

Although a fall in oil prices has led to a drop in fuel prices in recent months (down 4% over the past year, believe it or not), the cost of running a vehicle continues to climb steadily. The RAC's Cost of Motoring Index reveals that the average car now costs almost £5,540 a year to run (or over £15 a day), compared to £5,000 a year ago. Every six months, the RAC tracks all costs associated with owning and running seventeen of the most popular vehicles; here is its latest survey:

Overall, the cost of motoring has increased by a ninth (11%), which is far in excess of general inflation. As you can see, depreciation has increased by two-ninths (22%) in the past year, thanks to a sizeable drop in the residual value of three-year-old cars, down from 52% to 45% of the list price. In addition, finance costs have risen by a tenth (10%) and maintenance bills are up by a ninth.

Of course, this news means yet more misery for Britain's motorists, whose household budgets have already been stretched by rising Council Tax, soaring domestic energy bills (fight back here!) and higher mortgage rates. So, to turn those frowns upside down, here is a list of money-saving ideas for motorists. To begin with, all you need to do is to remember this memory aid: CLIO, which stands for Car, Loan, Insurance and Other expenses -- the four biggest costs for motorists.

CAR

Learn to appreciate why cars depreciate

Depreciation is the tendency for (a vehicle's) value to fall over time. As above report shows, it is the single largest expense for car owners, costing an average of more than £200 a month - even while a car lies idle in the driveway! Depreciation varies across makes and models, but tends to be greatest for vehicles in the 'Family Car' category, because of a plentiful supply of used cars in this sector. On the other hand, prestige German marques, compact executive cars and 4x4s hold their values best.

Hence, it's worth checking the residual values of used cars (seven million change hands each year) in order to get an idea of how much you can expect to lose over, say, the first three years of ownership. My way to avoid the biggest hit on depreciation is to buy a nearly new or one-year-old car -- this cut the cost of my wife's last car by a tidy £5,000. Personally, I'd much rather have an extra five grand in my savings account than have the social prestige of owning a brand-new car. Down with those awful Joneses whom people try to keep up with!

Go bargain-hunting

Whether you're looking for a new or used car, it pays to shop around. Haggling for discounts also makes sense, because the price you see is nothing but the maximum price, not the price you should stump up. This article shows you how to negotiate, and you'll find a list of dealer and broker websites here. As well as comparing prices online, be sure to call a few local dealers and car supermarkets to see if they can beat your best price.

Must you own a car?

The vast majority of private motorists in the UK prefer to own their cars, whereas tens of millions of people drive around in leased or rented vehicles in the US. In this article, I set out the pros and cons of owning versus leasing a car. In a nutshell, if you want low monthly payments and hassle-free motoring, a personal-leasing or contract-hire deal might be right up your street.

LOAN

Borrowing from your bank or arranging finance via a local motor dealer is usually a huge mistake. Indeed, according to The AA, it can mean paying up to £2,000 in extra interest. Ouch! At the start of this article, I listed the pluses and minuses of the various types of motor finance, including using savings, finding a personal loan, increasing your mortgage and opting for dealer finance.

As a reformed debt addict, I prefer to save up patiently and buy my wife's cars using my savings, because I don't do debt. For example, if you need, say, £10,000 towards the cost of your next car, saving £261 a month for three years would produce a lump sum of £10,026, assuming an after-tax interest rate of 4% a year.

> Here are several savings accounts which pay 5%+ a year before tax!

Although it's much better to earn interest than pay it, most of us don't have enough stashed away to buy a car outright for cash. Hence, we plump for personal loans, but most of us choose decidedly inferior loans. In this article, I show you how to avoid the twelve worst mistakes which borrowers make when looking for loans.

> Check out our ultra-low rates for unsecured personal loans!

INSURANCE

Although all motorists must have some form of car insurance (third-party cover is the minimum legal requirement), millions of us routinely overpay for this cover. To prune up to £400 a year from your premium, read these ten steps to cheaper car insurance.

> Our search engine checks 97% of the online car insurance market to find you the best deal!

Now it's time to dispense with four high-cost, low-value insurance policies which are sold alongside cars and loans:

1. As I explained here, payment protection insurance (accident, sickness and unemployment cover) is a huge rip-off, so avoid it at all costs. If you need a quality PPI policy, try SecurityFirst, whose cover comes at a tenth of the cost of the Don't Buys!
   
   
2. Extended warranties are also a big con. Three in five new cars are sold with extra warranties which lengthen the manufacturers' usual guarantee, but these usually prove extremely poor value for money.
   
   
3. GAP insurance: if your car is written off after an accident or theft, your motor insurer's payout may not be large enough to settle your finance agreement in full. In essence, GAP insurance covers the difference. Consumers find this product difficult to understand, so dealers charge the earth for it and trouser huge commissions. Avoid!
   
   
4. The market for breakdown cover is dominated by a trio of big players: The AA, Green Flag and the RAC. If you're worried about being stranded at the side of the road, don't be duped into paying £100+ for this protection. My wife pays just £32 a year for her "pay and claim" cover with Best Buy provider AutoAid.

OTHER EXPENSES

Servicing and repairs

British motorists spend around £7 billion a year on car servicing and repairs, or somewhere in the region of £300 per motorist per year. However, most of us take our cars to franchised dealers, which charge steep prices for parts and labour. My advice is simple: get quotes from a few local, independent garages before proceeding, as you could halve the cost of maintaining your car.

For example, my wife saved £112 by having her car serviced by a reputable, independent garage (£143), rather than the local Renault dealer (£255). Furthermore, thanks to a change in the law in October 2003, going to a non-franchised garage will not invalidate your extended warranty, whatever your dealer says!

Fuel

Rather than reinvent the wheel (ho ho), I'll direct you to point ten of this article, which explains various ways to pay less for your petrol or diesel, plus how to switch to ultra-cheap LPG (liquid petroleum gas).

Going away? Be careful how you pay!

When you're motoring abroad, make sure that you take the right credit card with you. Most credit cards charge a foreign currency conversion fee of 2.75%, which adds £5.50 to every £200 that you spend. However, the Post Office Classic MasterCard and Nationwide BS Classic Visa don't levy this fee, making them the perfect partner for touring overseas, with or without your car! As a bonus, here's some useful advice from The AA on European motoring.

Get some of your spending back

One final tip: if you always pay off your monthly credit-card bill in full, it makes sense to use a cashback credit card to pay for motoring and other bills. Play your cards right and you could earn an annual refund of £1 to £3 for every £100 that you spend.

Here's wishing you more miles for less money!

More: Use the Fool to find cheaper credit cards, insurance, personal loans and savings accounts!