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Drive Smart: How to Navigate the True Costs of Car Ownership

If you’re shopping for a new vehicle, you’ll want to learn what the true costs are.

You’ve set your sights on a new car or truck, but before you get swept up in the excitement, consider the bigger picture. The sticker price you see is just the beginning. Owning a car comes with many ongoing expenses and a drop in value over time. Let’s look at the true cost of car ownership to help you budget effectively and make an informed decision.

Upfront Costs

Depreciation
One of the biggest and often overlooked expenses is depreciation. This is the decrease in your car’s value over time. The moment you drive it off the lot, it starts depreciating, with the steepest decline happening in the first few years. This is a major “hidden” cost, so don’t underestimate it.

Taxes and Registration Fees
Apart from the sticker price, you can expect state taxes, and registration fees to significantly add to your initial costs. Each state has its own rules when it comes to car purchases. You’ll likely be charged registration fees, license plate fees, annual renewals, and sales tax, which can vary from state to state.

Recurring Costs

Financing Costs
If you choose to finance your purchase, the cost of the loan becomes a big part of your ongoing expenses. The total interest paid over the term of your loan depends on the interest rate and the loan duration. The lower the interest rate and the shorter the loan term, the less you’ll pay overall. Consider getting preapproved for a loan before shopping for your next vehicle. It can help you establish a budget, narrow your search, and avoid overspending.

Insurance
There are two key types of car insurance to consider: liability insurance, which is mandatory in almost every state and pays for injuries or property damage you cause to others in an accident you’re responsible for, and optional comprehensive and collision coverage. This optional coverage, often required by lenders if you finance or lease your car, protects your own vehicle from damage caused by accidents, theft, fire, vandalism, and even weather events.

The cost of car insurance, known as your premium, varies depending on several factors:

  • Age. Younger drivers generally pay more for car insurance than older drivers.
  • Location. Population density, accident rates, and theft rates in your area can all influence your insurance costs.
  • Driving record. A safe driving history with no accidents or tickets typically means lower premiums.
  • Vehicle type. Sports cars and high-performance vehicles generally cost more to insure than SUVs or sedans.

The level of coverage you choose also impacts the cost. While liability insurance is required, you can choose higher coverage limits for additional protection. Optional coverages like medical payments or uninsured motorist protection can also increase your premium.

Shop around for quotes and consider raising your deductible to potentially lower your premium. Premiums can range from 1% to 4% of the vehicle’s value annually.

Gas
Fuel costs can be a major expense for car owners. Because gas prices constantly change, it’s important to consider your car’s fuel economy (miles per gallon), local gas prices, and typical driving habits when budgeting for gas. You can calculate fuel consumption once you understand your car’s mpg and typical weekly mileage.

Hybrid and electric vehicles typically boast lower fuel costs per mile driven, but their sticker prices are often higher than traditional gas-powered vehicles. To make an informed decision, research the estimated annual fuel cost of traditional gas vehicles versus the estimated annual costs of a hybrid or fully electric option, which could vary depending on local electricity rates.

When weighing options, factor in the upfront sticker price and the long-term savings on fuel. With some research and planning, you can find the best vehicle to suit your lifestyle and budget.

Maintenance and Repairs
All vehicles require regular maintenance to keep them running smoothly and safely. Budget for routine maintenance based on your car manufacturer’s recommendations and your own driving habits. Regular maintenance, like oil changes and tire rotations, varies by manufacturer and model. Consult your owner’s manual for specific service intervals. Before buying a car, research its reliability ratings from reputable sources like Consumer Reports or J.D. Power. Choosing a car with a strong reliability record can help you minimize repair costs in the long run.

While routine maintenance helps prevent major issues, unexpected repairs are a reality of car ownership. Setting aside a budget for these repairs can help you avoid financial strain. While a minor repair might cost a few hundred dollars, a major repair like engine or transmission work could run much higher.

There might be advantages to purchasing an extended warranty to cover the cost of repairs for major components that may not be covered by a manufacturer-issued powertrain warranty. However, it’s important to weigh the cost of the extended warranty against the likelihood of you needing it. Be sure to read the fine print carefully to understand exactly what is covered.

Optional and Situational Costs

Parking
If you live or work in a city, parking fees can accumulate quickly. Monthly parking in urban areas or private garages can cost anywhere from a few dollars to more than $250.

Tolls
For those who regularly travel on toll roads, these costs can be significant. Depending on your commute, monthly expenses could range widely, with some drivers paying more than $250.

In the Driver’s Seat
Car ownership is a significant financial commitment. Remember, each vehicle and situation is unique, so do your research and plan ahead. Consulting with a financial planner can help you set a budget for expenses and ensure you make informed decisions that align with your financial goals.

If you have questions about auto loans and purchasing a vehicle, please contact one of our loan specialists.

Important Note: Costs can vary. Location, driving habits, and your chosen vehicle significantly impact expenses. Use these percentages and per-mile ranges as a budgeting starting point.