The finances of buying and owning a car

07 Apr 2021

Should I buy or lease?

What are the perks of leasing? Lower monthly payments, a fresh new car every few years, and maintenance handled by the owner. Now you might be thinking, why would anyone buy a car? The car owner that is leasing to you has to make money somehow, otherwise, they would go out of business pretty quickly! Signing a lease incurs fees that you will pay for every lease you enter. Over the long term, leasing will cost you more money because of these fees. The optimum "bang for your buck" would be to buy a slightly used car to avoid the initial depreciation cost of a new car (~25% per year for new cars vs ~15% for used) and drive it as long as possible after you are done with your payments.

How much should my down payment be?

The best answer here is to pay off the whole cost of the vehicle and not to finance a liability (a car only costs money and does not provide an income). However, this is probably not practical to save for months to buy a car in cash. For the minimum down payment, you should aim for no less than 10% of the total cost of used cars and at least 20% on new cars. This is to show your lender that you are motivated to pay them back and will be more likely to be approved for the loan. The benefit to you will be lower total interest paid and might also result in a lower interest rate! A lower interest rate will mean a lower monthly payment. Not being able to put down the recommended down payment could be a sign that you are looking at a vehicle that is outside of your budget as well. Consider waiting until you save up more money, look for a cheaper car, or remove some of the add ons that the dealer might be pushing on you.

Buying a car is more than just the sticker price

When deciding to buy a car, we usually just consider the impact the monthly payment will have on our budget. If you are not taking the hidden expenses into account, you can quickly blow your budget and get stuck with a car you cannot afford!

These unexpected costs and fees come in two varieties, avoidable and unavoidable. The unavoidable costs and fees are things like taxes, insurance, and registration. These need to be factored into your vehicle's cost assessment as they will definitely be responsible for increasing your total purchase price. Taxes will depend on the city and state you live in but can range from 2-7.25% of the total price. Full coverage insurance will be required if you are financing your car and, again, depends on where you live as well as the value of the car. Buying a brand new, risky sports car will cost much more to cover than a used minivan. Registration on the vehicle could include emissions and safety checks along with the license plate and yearly registration sticker. Registration will also fluctuate based on the Blue Book value of the car you are buying. While these are all mandatory, you can strategically lower these costs! Buying a used and "less risky" type of car will both work toward lowering all of these unavoidable costs.

Avoidable costs, on the other hand, are usually "upcharges" offered by the dealership selling you the car. As soon as you pick out the car you want and are excited to drive it off of the lot, the "finance person" will want to talk to you. They are going to start pushing a lot of add ons to the car. These might include extended warranties and service packages, tinted windows, paint/windshield/key protection, etc. These add-on expenses are usually never used or are extremely overpriced. This is where dealerships can make a lot of extra money and leave you blowing up your budget. Doing your research beforehand will allow you to knowledgeably accept or decline these additions without feeling pressured. Other avoidable expenses are the services that the dealership is providing. These pay the person that sold you the car a commission, the delivery costs to move the vehicle to you, or all of the paperwork and other logistics. To avoid these ancillary fees directly from the person selling the car. This will require a little more work from you to set up the loan and get all of the paperwork notarized but will also save you quite a bit of money on things like "delivery" and "handleing" fees.

Hidden costs:

  • Taxes
  • Insurance
  • Registration
  • Extended Warranties
  • Delivery Fees
  • Paint and Fabric Protection
  • Key Protection
  • Anti-Theft Window Etching
  • Gap Coverage
  • Windshield, Tire & Wheel, or Dent Protection
  • Tire and Wheel Packages
  • Maintenance Packages

Long-term cost of owning a car

When deciding to buy a car, we usually just consider the impact the monthly payment will have on our budget. If you are not taking the hidden long term expenses into account, you can quickly blow your budget and get stuck with a car you cannot afford!

What is a long-term expense? These are things like regular oil change, new tires, and inevitable repairs. These also overlap with the initial hidden costs mentioned above when it comes to annual registration and insurance. While all of these expenses are unavoidable, they can be planned for! Having your car break down and needing a new transmission or replacing all of your tires can be devastating! Repair shops will take advantage of this vulnerability by offering extremely high-interest credit cards (30% or more) regardless of your credit. How do you avoid this? Build these expenses into your monthly budget! Since these expenses will be few and far between, you might as well earn interest on this money. Setting up a savings account or investing (liquid assets so you can withdraw quickly) the money you put aside each month is a way to squeeze out a little extra value from your hard-earned money while reducing your vulnerability to unexpected expenses!