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.

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