Shopping for a car can be thrilling — who doesn’t love that new car smell? — but also a bit eye-opening. Many car buyers are unaware there are two costs involved: the cost to buy and the cost to own.
“After shopping around and finding the car you want, you may find yourself ready to make a transaction, not realizing that there are suddenly a lot more upfront costs that you might not have originally considered,” says Melani Scamardo, a CERTIFIED FINANCIAL PLANNER™ practitioner and advice director at USAA who specializes in financial advice pertaining to buying, owning and selling a vehicle.
The Cost to Buy a Car
In addition to the purchase price, buying a car includes the cost of:
- Tax, title and licensing fees
- An extended warranty
- Any sort of service plan for your vehicle
- Fees for possible documentation prepared by the seller
- Research and mechanic fees (if youre buying a used car, you’ll want to make sure you’re not buying a lemon)
- Guaranteed Asset Protection
- Add-ons (such as audio or navigation packages, tinted windows or upgraded floor mats)
Here’s the really good news: “You can negotiate on just about everything,” Scamardo says, “so before meeting the dealer, do your research and shop around. Look up a number of different vehicles online, check out social media and blog posts, talk to people who have the vehicle you have in mind and get quotes.”
This way, you’ll be armed with the right information and get an idea of how much these expenses might cost.
Another bonus: You can get quotes on extended warranties from private parties rather than the dealer or manufacturer, and this can often cost less money. Even better, you can shop for extended warranties on both the price and the features of the policy, such as what’s covered, deductibles, where you can get your car repaired, if towing is covered, if a loaner vehicle is covered, etc.
If you do intend to buy from a dealer, plan on negotiating these costs
The Cost to Own
While there’s no way to put an exact number on the total lifetime cost of owning a car, making an educated guess can keep you from paying more than you can afford and causing stress in the long run.
“Typically, when most people are shopping around for a car, they think, ‘What’s the monthly payment that I can afford?’ when, in reality, the loan payment can be about half of what the total payment is each month,” Scamardo says. “You need to add in fuel cost, insurance, maintenance, repairs, registration and inspection fees.”
When You’re Getting Ready to Buy a Car
Check out a few tips for determining the true cost of car ownership and reducing the overall cost:
Identify your driving lifestyle. Before you buy is the time to determine your daily travel, as well as any extra treks you plan on making within a year, such as road trips, visiting family in nearby cities or giving friends rides around town.
And parking! If you’re going to use your car to commute to work, you pay a premium for municipal parking in most large cities. Know your company’s policy — do they offer discounted rates for employees? Do they have parking at all? Or will that be another expense you’ll have to carry?
Determine what you can realistically afford in the long run. In other words, estimate the total cost of owning a vehicle over time – not just the monthly loan payment, but also insurance, fuel, maintenance and repairs. How would this amount affect your monthly cash flow? If you had this expense over the past three months, would your cash flow still be comfortable or will you need to make sacrifices in other budget line items?
Search for rebates. We all usually have an idea of the car we want, but you shouldn’t settle on a make and model until checking for special deals offered by the manufacturer or your local dealer.
These bargains go by many names — rebates, cash-back incentives or bonus cash — but they all can mean “discount” to you. By checking local car dealers’ websites, you’ll see what they’re offering. And now’s probably the time to start paying attention to those otherwise ignored radio and TV commercials from local dealers. Also, check USAA’s Car Buying Service for member-exclusive manufacturer incentives.
“A rebate is a great way to reduce upfront costs,” Scamardo says.
Add up the interest. The lower the interest on your auto loan, the more you’ll save over time. Shaving a couple of interest points can mean long-term savings.
Try to get pre-approved before you arrive at the dealership. Start at your bank to see options for pre-approval, or find lenders online that specialize in car loans. These auto loan calculators can also help you weigh financing offers.
Compare insurance. In addition to your age, location and driving habits, insurance companies factor the type of car you drive into your rates. Some vehicles cost more to insure than others. You might also pay more to insure a vehicle model that’s commonly stolen or costs a lot to repair. Investigate the average insurance losses online for the car you want to buy.
Dig into depreciation. Unless you plan to drive your car until the wheels fall off, depreciation is a major consideration. A car with a high resale value can prove to be the best financial bet because you’ll get more cash when you sell it.
Automobile data company ALG provides depreciation ratings, so give them a look to see where the cars in your consideration set stand.
Factor in fuel. Again, gas prices can be a huge factor in how much your car will cost you every month. Be realistic about how much you’re going to be driving to see how much you’ll be spending.
Choosing a fuel sipper over a gas guzzler can make a huge difference in long-term costs, as will the kind of gas you’ll be required to use. Some luxury and performance car manufacturers recommend you use only premium gas, which is more expensive. According to the Department of Energy, a vehicle that gets 30 mpg will cost $672 less to fuel each year than one that gets 20 mpg (assuming 15,000 miles per year and a fuel cost of $2.69 per gallon). Fluctuations in gas prices over the past few years show us the importance of making a carefully reasoned decision.
Set aside money each month for maintenance and repair. Putting money into auto upkeep is inevitable, but how much money you’ll spend on maintaining a car depends on the car and whether it’s under warranty.
“If you are buying a non-luxury vehicle, you might anticipate an oil change costing $45. A luxury vehicle might be $200-$300 for an oil change,” Scamardo says. “Not knowing that up front can make it a really bad car owning experience for the next few years.”
Scamardo recommends setting aside money each month for maintenance and repair to reduce having to dip in to emergency funds or creating debt by using a credit card.
Most warranties expire after a few years or once your car reaches a certain mileage, so inquire about that at the dealership or consider an extended warranty, such as USAA Extended Vehicle Protection from Assurant Solutions.
Be aware that warranty plans often require you to keep up with routine scheduled maintenance, like oil changes and tire rotations.
Need some help buying a car? Use the USAA Car Buying Service to find, finance and insure your next vehicle.
About the Expert: Melani Scamardo is a CERTIFIED FINANCIAL PLANNER™ practitioner with 15 years of experience in thefinancial service industry, with a focus on the standardization, delivery and implementation of financialadvice pertaining to buying, owning and selling a vehicle.
Investments/Insurance: Not FDIC Insured • Not Bank Issued, Guaranteed or Underwritten • May Lose Value
USAA Car Buying Service provided by TrueCar, Inc. USAA Bank receives marketing fees in connection with the Car Buying Service.
Extended Vehicle Protection is not underwritten/issued by USAA or its affiliates. USAA Extended Vehicle Protection VSC Program is provided by United Service Protection Corp., Assurant Service Protection, Inc. (OK), and United Service Protection, Inc. (FL) (FL Lic. # 6001600), each an Assurant Solutions company. USAA Extended Vehicle Protection Mechanical Breakdown Insurance is underwritten by American Bankers Insurance Company of Florida (AK, KY, MA, MI and OR) and American Security Insurance Company (CA), each an Assurant Solutions company. The third-party underwriting/issuing this coverage has sole financial responsibility for its own products. Mechanical breakdown insurance offered through USAA Insurance Agency, Inc. or USAA of Texas Insurance Agency. CA Lic. # 0D78305, TX Lic. # 7096. Enrolling or not enrolling in the Extended Vehicle Protection Program will have no effect on any credit application or terms of credit with USAA. Once your vehicle purchase is complete, your contract will be mailed to you, and you will have 60 days to notify the relevant Assurant Solutions company if you wish to cancel and receive a full refund. The contract contains additional information, including the terms, conditions, eligibility requirements and exclusions that could prevent you from receiving benefits. Please read the contract carefully for a full explanation of your benefits. Company and state-specific information is subject to change. USAA Relocation Services, Inc. receives marketing fees in connection with the Extended Vehicle Protection VSC Program.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
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