For many Americans, the excitement of a new car often ends when the hidden costs of ownership start to add up. While the sticker price may grab your attention, additional expenses can quickly turn a dream purchase into a financial headache. That’s why it’s crucial to understand the full scope of ownership, secure affordable car insurance from the start, and plan ahead to minimize these unexpected costs.
Vehicle Financing and Interest
If you apply for a loan to finance your car, one of the first hidden costs you’ll need to consider is the interest on the loan, especially if you’re going to be paying it back over five or six years. The higher the interest rate, the more you’ll pay over time.
Remember, even if your monthly payments are within your budget, a high interest rate on your vehicle financing loan means the total amount you pay will be significantly higher than the price you see on the windshield.
How to Get the Best Deal
There are various ways you can minimize the hidden costs associated with financing your new car. For starters, make as big a down payment as possible, as this will reduce the amount you need to finance through a loan and potentially result in lower interest payments.
Don’t settle on the first financing option you can find. Shop around for the best loans by comparing interest rates and loan terms from your bank, credit union, or the car dealership. Consider taking a short-term loan, as you’ll pay less interest, even if you need to make higher monthly payments. Lastly, try to improve your credit score before applying for a loan, as you might qualify for lower interest rates.
Vehicle Insurance
Mandatory in almost every state, car insurance is something you’re going to need to pay for every month. However, how much you pay can vary depending on your car, where you live, your driving history, and your credit score.
You’ll also usually have a deductible, which is the amount you pay out of pocket before your insurance covers a claim. This means that when you take out coverage, you need to make sure you can comfortably cover your deductible if an accident happens.
How to Find the Best Value for Money
As with vehicle loans, shop around for insurance rather than opting for the first quote you get. Getting quotes from different providers enables you to predict what your monthly or yearly costs are going to be, which can help you make a decision. Another approach is to bundle different policies, such as auto and home insurance, with the same provider. The reason for this is that many providers offer discounts for bundled policies.
It also helps if you keep your driving record as clean as possible, as insurers are likely to charge higher rates if you have a record of traffic violations or accidents. Additionally, if you have sufficient funds to cover it, consider choosing a higher deductible. This can also help reduce your monthly payments.
Vehicle Depreciation
Depreciation is the most hidden of all the costs of owning a car, and it’s one you’ll only notice if you decide to sell or trade your car for another model. A new car starts depreciating in value from the moment you drive it out of the dealership premises.
Usually, a new car loses about 20% of its value in the first year. Skip ahead five years, and your car will have lost approximately 60% of its original value.
How to Limit Depreciation
You can’t prevent your car from depreciating in value, but with careful planning, you can minimize how much it depreciates. When purchasing a vehicle, ensure it has a high resale value, as some models depreciate more rapidly than others. You might find it helpful to research which makes and models offer the best value retention.
Consider buying a used vehicle rather than a new one, as the greatest depreciation happens within the first two or three years of purchasing a new car. A three-year-old model is still new enough for you to enjoy that new car feeling, yet is old enough for the original owner to have absorbed the worst of the depreciation. And don’t forget to budget for regular vehicle maintenance, as keeping your vehicle in good condition can help it retain more value for longer.
Gas Costs
While gas isn’t exactly a hidden cost, it’s one that’s easily overlooked when calculating the monthly cost of purchasing a car. Remember, in addition to paying your monthly loan payments and insurance installments, you also need to buy fuel so you can use your vehicle – and there’s no escaping the fact that gas costs add up.
Also, with gas prices fluctuating regularly, it can be difficult to predict your monthly or yearly spending accurately. In 2023, the average American household spent $204 per month on gas ($2,449 for the year). This accounted for around 3.2% of the average person’s total spending.
How to Keep Costs Low
One of the best ways to keep your gas costs low is to consider fuel economy when looking at cars. Choosing a fuel-efficient model could see you save hundreds of dollars every year. Plus, when you know your vehicle’s fuel consumption (miles per gallon) and the routes you use regularly, you can predict how much gas it will use each day. This can be incredibly valuable when it comes to working out your budget.
Fuel-saving apps can be great tools for planning ahead and saving on fuel costs. Use one of these apps to find the cheapest gas prices near you. Lastly, aim to drive more efficiently, as accelerating harshly, speeding, and idling can increase your vehicle’s fuel consumption.
Crunch the Hidden Costs of Car Ownership
Buying a car should be cause for celebration, not the beginning of sleepless nights worrying about hidden costs. These and other expenses come with the territory, but they’re not insurmountable. With a little forward planning, you can prepare for them long in advance so that every journey in your new vehicle is as stress-free as possible.
