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The hidden cost of car ownership
Typically, when a person considers the cost of a car, they tend only to think of the price tag on the window. That price is just the tip of the iceberg, though. AAA reported that the average car ownership costs in 2017 were over $8,000 per year, and those costs have risen since.
Before you choose to purchase a new car, it is important to understand all of the costs that go with car ownership.
Overview of a car’s price tag
The initial investment of a car includes all of the costs one typically pays out in the first few days or weeks of purchasing the car.
The price of the car is a large portion of the equation. It depends on the car you purchase, the condition the car is in, and more. Sometimes, a buyer can find a used car that they can pay cash for upfront. This happens often when people receive their tax refunds.
If you are able to pay cash for a car, you can save yourself a good bit of money over time. Paying cash means that you are not paying finance charges and interest for years.
Before you begin shopping for a new car, take some time to understand different factors that might affect the total car cost. This can often help buyers find a car for less than they might normally pay.
Used car pricing is almost always lower than new car pricing. However, it is important to note that used cars may come with additional upfront costs, such as repairs, so used is not always better price-wise.
One factor that affects the overall price is the initial investment. Here are a few things that affect this initial price:
Make and model of the car
A Mercedes will, of course, cost more than a Ford. Additionally, cars from the same company will have differences in price according to the car’s features. Some makes and models are known to retain value better than others based on performance, build quality or prestige.
Condition of the car
The newer the car, the higher the price, of course. Used car pricing is almost always lower than new car pricing. However, it is important to note that used cars may come with additional upfront costs, such as repairs, so used is not always better price-wise. You must consider the overall vehicle cost you will pay for that car and get it moving.
Supply and demand
When many people are shopping for cars, it is not unusual to see prices rise. When the number of buyers decreases, the price often does as well.
This means that it is usually better to purchase a car during an “off” season. It may be tempting to purchase your new car with your tax refund, but this may lead you to pay more as there are many people shopping for cars at that time.
In addition, sometimes you may need costly repairs for your vehicle. These can be anything from bodywork to engine work. Careful driving and good car maintenance can help decrease the chances of big repairs.
About the down payment
If you are not able to purchase your new car with cash, you are probably going to have to have a down payment so you can finance the rest of the car. The amount of down payment will depend on the car you are purchasing and its total cost. A general rule of thumb is to put down 20% for new cars and no less than 10% for used cars.
Some loans may not require a down payment though some will require you to pay a couple of thousand or more down. Even if you are not required to pay a down payment, it is not a bad idea. The more you can pay down, the less you have to borrow and the less interest you pay overall.
Factoring in monthly car payments
When you finance a car, there are several costs you have to deal with. The first is your monthly car loan payments. These monthly payments include money for the principal amount, finance costs, and interest on the loan.
In many cases, there is a difference in new and used car payments of a couple or a few hundred dollars. This is not always the case, though. Sometimes, even used cars come with high finance charges.
Additionally, the interest rate can vary greatly depending on the automotive finance market at the time of purchase and your credit score. The current market rates and your credit score can increase or decrease your monthly payment by large amounts.
Taxes, tag, and registration costs can vary greatly according to purchase price, sales tax rate, and more. And you must renew the registration each year.
Taxes, tag, and registration
After purchasing a car or signing a loan contract, you have to get the car put into your name. If you are paying on the car, it will not be fully in your name until you have paid it off. However, you still must register the car under your name and get a tag for it.
These potential costs can vary greatly according to many factors including the purchase price, the car sales tax rate, and more. And do not forget that you must renew the registration each year.
Overview of a car’s driving costs
Owning a car also includes ongoing expenses that occur daily, weekly, monthly, and quarterly. These expenses can include:
It takes fuel to run a car, and this cost never seems to end. For those that only drive to the grocery store, their average price of fuel for the entire year might be just a couple hundred dollars.
Many car owners also have to add the price of parking into the cost of owning a car. If you park in the same area often, you might be able to save money by paying monthly fees to a parking garage, but parking costs can add up quickly as many people pay between $100 and $200 per month.
Overview of preventative and ongoing maintenance
To keep your car running well, there are certain types of maintenance costs that you will pay. For instance, you have to keep your oil changed every three months or around every 5,000 miles. You also have regular maintenance expenses for such things as:
- New tires and tire rotations
- Refilling fluids
- Changing air filters
- Shocks and struts
- Windshield wipers
- New battery
In addition, outside of regular maintenance, there will often be times you need more costly repairs on your vehicle. These can be anything from bodywork to engine work. Careful driving and good car maintenance can help decrease the chances of big repairs, but there are no guarantees.
Overview of insurance
In order to drive legally, every state requires that you carry liability auto insurance. The amount of coverage varies according to state.
Typically, you must show proof of insurance to be given a tag for your new vehicle. Most car lots and finance companies will not allow you to drive off of the lot without proof of insurance.
Insurance costs vary according to the car, your driving record, and even your credit score. You cannot be turned down for insurance due to bad credit but it can increase the total cost.
Some insurance companies offer discounts for different things, such as bundling and being married, so it is best to speak to multiple companies before choosing one. As your car insurance premium is part of your car costs, you want to find the lowest rate.
Overview of depreciation costs
According to Carfax, a car’s value depreciates a full 10 percent when driven off the lot, 20 percent the first year, and another 10 percent every year after. This means when you purchase a new vehicle on a loan, you pay way more than the car is actually worth.
This may not seem like a big deal to some, but it does greatly affect the resale value of the car. Therefore, it is important to include the depreciation expense into the total cost of owning a car.
A financial decision: buying a car vs keeping your car longer
In most cases, it is cheaper to keep your car than purchase a new one. However, if your car costs more than other vehicles, such as using much more gas than average cars, it may be better to invest in a newer one.
If you are getting ready to purchase a car, SmartAsset suggests that your vehicle costs should be less that 15 percent of your take-home pay.
The best way to decide this is to know the full cost of keeping your current car and researching newer vehicles. Be sure to factor in the type of repairs your current car needs. If it is a major issue, it might be best to lean toward a new one.
Purchasing a new car, though, does not mean you have to purchase brand new. Instead, wait until a car has been out for a couple of years. You will get the benefits of a newer vehicle at a much lower price.
A deeper dive- Related reading from the 101:
- Best time to buy a car | Autos 101
Some times are better to buy a car than others.
- How to get a car loan with no credit history | Autos 101
If you are just starting out and have no credit history, these are great tips to follow.
- You can negotiate your auto insurance- here’s how | Finance 101
Use these tips to get a lower car insurance rate.