Costs To Consider When Buying A Car

The path your car costs are going to take is determined from the time you make the decision – new or used? While most of the costs of either a new or used car will apply to both new or used, it can be worth evaluating the commitment of each cost, and whether it is truly necessary.

The costs of insurance

Typically an older used car is going to be cheaper to insure than a shiny new one, because it will be cheaper to repair if you’re in an accident, and cheaper to replace if it is stolen.  Therefore, look at how much you can afford to spend on insurance costs before you buy your next vehicle and make sure you calculate the cost of insurance based on the actual vehicle, the year of manufacture and the mileage on the clock because two cars that appear similar could have vastly different insurance costs.

Other ways to minimize your insurance costs include:

  • Choose a higher deductible.  The deductible is the amount you have to pay if you claim on insurance and it is typically around $250.  However, if you increase the deductible amount to $1,000, for example, you can save between 20 and 40 per cent on your insurance premiums.  You can then set aside a portion of these savings to cover the deductible amount if you do make a claim.
  • Calculate whether you need comprehensive coverage.  When buying a used car you may be able to do without collision or comprehensive insurance on your policy.  This is because you can easily be paying more than the car is worth, so take your comprehensive coverage and your collision premium and add them together then multiply the amount by 10.  If your car is worth less than this amount don’t add the coverage to your insurance policy because on average you will only make a claim every 11 years, and report a total loss only every 50 years.
  • Maintaining your credit score. More insurance providers are considering their customers credit ratings as they calculate their premiums and if you have a bad credit history you can be paying as much as 50% more.  Therefore, make sure you pay your bills on time, and make regular checks on your credit report to see that there are no items which you are not responsible for.
  • Ask for a low mileage discount. Many insurance policies will offer you a discount if you travel less than the average number of miles in a year.  Therefore, if you typically drive less than 12-15 thousand miles a year you may be eligible for a discount.

Depreciation

Another major difference in car ownership costs between a new and a used car is the cost of depreciation.  A new car will lose 15-20 per cent of its value each year you own it the first few years, so as soon as you drive it out of the lot it is losing you money.  For example, a $25,000 new car will have depreciated in value to $20,000 after the first year, to $16,000 after the second year and after just three years will only be worth around $12,800 which is almost half of its original sale price.  This is also dependent on the fact that you have kept the car in good condition, have not gotten into any accidents and serviced it regularly.

Also remember that you are financing a depreciating asset when you borrow money to buy a new car.  This means you are borrowing money and paying interest on an asset that is decreasing in value and you can easily find yourself owing more than the vehicle is worth.

Instead, consider the fact that the average used car in the US is worth around $14,000.  While it is possible to buy a new car for this amount, it will be a small hatch with base features.  However, if you look at used cars in the same budget, you can find a midsized car with all of the features you want.  You’ll also have lower insurance premiums with an older car.  Plus, many manufacturers have been offering extended five-year warranties and so a used car can often be found which is still under its new car warranty.

If you are still obtaining finance to buy a used car, you may also find you are charged a higher interest rate, but keep in mind that you are borrowing less and so the loan is for a shorter term.  The lower initial costs and the lower depreciation costs of buying a used car can easily outweigh any of the higher costs associated with used car ownership.

Taxes and fees

It is easy to get swept up in the excitement of buying a new (or used) car, negotiating the price and finally coming to an agreement of the dealer.  However, before you sign the papers, make sure to ask about the out-the-door costs.  This is the price you will actually pay to drive away the vehicle and covers:

  • State and local sales tax.  This is calculated depending on the state in which you purchase your car, and is calculated based on the sale price of the vehicle.  Depending on the price of the car, this could add hundreds, if not thousands, to the final car price.
  • Department of motor vehicles fees.  This is the cost to register the vehicle and if you are buying a used car, transfer the registration to your name.  Registration costs depend on the type of vehicle and often the size of the engine, but can be as individual as insurance calculations so it is best to work these out based on your actual vehicle decision.
  • A documentation fee.  In some states the doc-fee is a set price, for example in California it is $45 however, in other states dealers can charge whatever they think they can get away with.  In some cases the doc-fee can be an extra $900 on top of the sale price of the vehicle allowing the dealer to recoup costs they have lost in discounting the  price of the car.

A good dealer will be able to give you a calculation of out-the-door costs.  If they can’t calculate that on the spot, be wary of hidden costs.

Negotiating a sale price

If you are purchasing a new car you will have to deal directly with the dealer and the price of cars from dealers is typically more than you will pay at a private sale.  However, if you are looking at used cars in both private sales and from dealers the dealer will be more expensive because they are offering a warranty and after sales service.  If you do happen to find an amazing deal on a used car in a private sale, make sure you get an independent mechanical report done to highlight any issues, which could be expensive maintenance costs down the track.

When you buy a car you also open up the possibility of paying with cash, so you know you are only buying a vehicle you can afford.  If you don’t want to wait to save up for a car purchase, organize your financing before you start searching for a vehicle so you know what you are eligible to borrow.  Start your search by comparing the rates and deals for credit unions and local banks rather than the big banks as they can often offer you a lower interest rate.  Of course don’t expect to secure the best interest rate if you have a bad credit history.

However, don’t tell the dealer you already have your financing organized, because many dealers will make as much from the finance as they do from the sale of the car, so if they believe they can secure your financing business too, they are more willing to negotiate the sale price of the car.

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When it comes to negotiating the sale price of the vehicle don’t be afraid to haggle because even though we are not a society which typically works by haggling over prices, car sales is the exception.  If you find a dealer who is not interested in negotiating on price, be willing to walk away to find a better deal; this is also why it is important not to be too emotional over your choice of vehicle, and don’t get too attached until you’ve signed the papers on a price you’re happy with.

Research your purchase

As the costs of buying, owning ,and running a car can differ so significantly depending on the state you are buying in, your age, your gender and the age, condition and mileage of the vehicle, it is best to do some research of your own online to get a guide on prices, and costs for the vehicle you are considering.

For example, at sites such as edmunds.com or kbb.com you can order a vehicle history report on any vehicle by providing its VIN.  This report will tell you whether the car has been stolen, whether it was ever in an accident, whether it was a rental car or a taxi, you can even find out if its odometer has been illegally wound back.  A CARFAX report will typically cost you $25 each, however if you are knuckling down for a serious search, you could benefit from paying $30 for access to unlimited reports for a month.

You can also find out about the service history of the vehicle as the way the car has been serviced will tell you more than knowing any particulars about the previous owner.  You want to be able to see a full service history, ideally where the vehicle has been serviced at the same place each time, and you are looking for a vehicle which has had just one or two previous owners as the history is much easier to track.

Whether you buy new or used, car ownership is going to be a significant financial responsibility. Car ownership is also unlike purchasing any other asset because a car is going to continue to depreciate the longer you own it, so it is up to you to make the best choice at purchase, and maintain the vehicle so you can get the best out of it, to make up for the losses you may make when you come to sell the car.

Can you think of any other costs of car ownership?

Alban is a personal finance writer at Home Loan Finder, where he provide tips and advice on investment loans

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Published or updated May 11, 2013.

Comments

  1. Not more than ten minutes ago I just renewed the license plates for one of our vehicles online. We bought a used SUV, which I knew would have a higher cost than a car, but there was still a bit of sticker shock when it was $60 than what I had been paying in the past. Such is the cost of having a car!

  2. In some states, a personal property tax is levied every year (Georgia for example). When your birthday rolls around you owe a big tax bill based on the value of your car, typically hundreds of dollars.

    Side note: my birthday is much more pleasurable now that I’ve moved.

  3. “For example, a $25,000 new car will have depreciated in value to $20,000 after the first year, to $16,000 after the second year and after just three years will only be worth around $12,800 which is less than half of its original sale price. ”
    Sorry, I just had to point this out. In what world is 12,800 less than half of 25,000?
    Other than that, great article. I’m personally still a little hesitant about the bargaining part. Is there a recommended number or percentage to bargain them down to?

    • Umm, We were just making sure you were paying attention! Yeah, that’s it. I’ve updated the wording to say almost half.

      Thanks for pointing that out!

      Bargaining partially depends on whether it’s a new car or used. If it’s new you can use Edmunds to figure out the invoice price and what the car is selling for at dealers in your area. Also look at what rebates are being offered to the dealer. From here you can find a price range to aim for.

      For used cars use Kelly’s as a starting point. Talk to the mechanic you bring the card to.

      There’s no hard rule on negotiating. Find a price that you are happy with.

    • Christopher says:

      To find a good price to pay for whatever model you want use http://www.truecar.com, which is free and will tell you what people are paying in your area.

  4. One of the biggest costs I have with car ownership are maintenance expenses. Just yesterday I had to replace all 4 tires since one blew out and the others were in close-to-death shape…that’s $350. A few months ago the thermostat housing cracked in half because I bought a crappy car (Chevy Aveo), and that was $350. In November I had to have two belts replaced for $425. I also go through $6 of brake fluid every year or so and pay $25 for oil changes every 4000-6000 miles. I hate my car but I hate car payments more, so gasoline and maintenance are my biggest expenses…stupid car…

    • Sorry to hear about the expenses.

      Certainly a big consideration in a used car has to be replacement and maintenance costs.

  5. Another tip I’d add for negotiating the price of your car is to check if you qualify for any pre-negotiated pricing program:
    – Costco: Costco has a great auto purchase program, where they negotiate preferred pricing with selected dealers ahead of time. If you’re a Costco member give them a call and see how much you can save. Note – Sometimes you also receive additional savings on maintenance through this deal too.
    – Work: Check with your employer to find out about any special prearranged auto purchase plans they have available.

    I purchased both of my last two cars using each of the programs described above. When I used the employer’s saving plan, I was able to get the dealer to throw in some additional savings (e.g. free tint) too. Happy Negotiating!

    • Every little bit helps and you need to do your research when buying a car.

      Also, don’t assume a discount somewhere is the best price you can get. One company I worked for had a relationship with a major auto company and we were able to get cars for a slight % above invoice. Thing is, if you do your research you can still get the car cheaper.

  6. Rental reimbursement coverage is important, too, if you don’t have access to a second car. Even if your car gets fixed when it’s in the shop, you’ll still need a way to get around. Gap (loan/lease payoff) insurance is hugely important too, should your car get totaled before you pay it off.
    And don’t forget to get $15,000/30,000 worth of uninsured/underinsured motorist coverage. A lot of idiots like to drive around without coverage, and this protects you against them.

    Forgo the uninsured property damage coverage though – a complete waste that only comes into play if you get hit by an uninsured driver who damages something you own, other than your car. (It’s only useful if you drive around with Waterford crystal in your trunk.)

    • I think it’s important to look at your coverage and see which parts to bump up besides the minimum. Depending on your car and circumstance it may be wise to increase the amounts offered and it may not cost too much more.

      With rental reimbursement, you may want to check out a car rental place and see what kind of car is offered for what your insurance gives. If you have a minivan or SUV that gets into an accident you may be surprised to find that your insurance only gives you enough credit for a sub-compact and you may have to go out of pocket to upgrade the car.

  7. I quite often struggle with buying new vs. used because with GM family pricing along with sweet financing deals, the new car doesn’t cost much more than a barely used version of the car. I have been researching used cars for quite some time now and I am not finding these great deals on cars that are just a year or two old. Maybe my sleuthing needs to improve. We will need to replace my husband’s car in the coming months, so I will be keeping my eyes open for sure.

    • I saw some articles recently that discussed this issue. Used cars are in demand in this economy and car dealerships actually make more off most used cars than new cars since it’s harder to judge the value of a used car (no two used cars are exactly the same). Add to that the warranties and such that dealers add plus the higher financing costs and used cars are sometimes not really cheaper.

      At the same time new cars need to be pushed off the lot and in this economy you can get cars at almost invoice (sometimes less) with zero or close to zero% interest financing.

      I think the gap between used and new is closer than it’s ever been.

  8. Don’t forget that sales tax on a new vehicle can be tax deductible! We got over $1,000 extra back in our tax refund when we bought our truck last year.

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