With rising car prices, increasing interest rates, and surging gas prices, it might be challenging to gauge just how much a car is going to cost you. However, before beginning the car-buying process, it’s critical to understand the expenses and all the hidden costs of owning a car beyond the sticker price.
You’ll likely experience the same shock I did the next time you need to upgrade your ride. Buying a car is one of the most expensive purchases a person will make in their lifetime. In fact, the average price of a new car in America currently exceeds $48,000!
If you’ve ever gone through the process of buying a car, you likely primarily focused on whether the monthly payments would fit within your budget or not. But in this article, we’re going to break down all the extra hidden expenses that you’ll incur with the privilege of automobile ownership.
$1,000 Car Payments?!
Of course, it’s always a wise decision to pay cash for a car, but due to the rising costs, many folks have to take out an auto loan. In 2023, the average car loan interest rate hovered around 9% with an average monthly payment of $725. Ouch!
As a result of soaring automobile costs, we are now seeing nearly 20% of new car buyers taking out loan terms up to seven years, with monthly payments of $1,000. Without a doubt, it’s becoming increasingly difficult for everyday folks to afford a new car. But if you think that’s the only cost of owning a car…buckle your seatbelt – we’ve barely left the driveway!
How much does it really cost to own a car?
Let’s talk about depreciation. The moment you drive that spanking new ride off the lot, the value drops 30%. That’s significant. Even more unsettling, most individuals borrow money to buy a car. Why would you borrow money to buy an asset that immediately drops in value by 30%? Seems like a double whammy! I can only imagine Warren Buffet dropping his head in disbelief.
Each year, AAA publishes its annual Your Driving Costs study that examines the most popular automobile models on the market and breaks down the hidden costs of owning a new car including depreciation, finance, fuel, insurance, license/registration/taxes, and maintenance/repair/tires.
In 2022, for new vehicles driven 15,000 miles a year, average car ownership costs were $10,728 a year, or $894 a month. This is considerably higher than just a few years ago in 2017 when those expenses were $8,500 a year, and roughly $700 per month. That means that in just five years, the average cost of owning a new car jumped nearly 28%!
The hidden costs of owning and operating a vehicle includes:
- Fuel (average $200 per month)
- Maintenance, repairs & tires (averages $800 per year)
- Taxes, license, and registration fees ($150 average)
- Insurance premiums (average $148 per month)
- Depreciation (up to 30% year one! ~10% each year after)
- Interest & financing charges (varies, 7% – 20% in 2023)
- Parking and toll fees
- Traffic violations
Here’s an interactive calculator from AAA showing some of the estimated charges depending on your make/model, and the state you live in!
7 Pieces of Advice When Buying a Car
If you’re in the market for a car, consider these tips:
- Buy used, not new. I get the desire to enjoy that new car smell, but you’ll be far better off financially by opting for a gently used car instead. You will save thousands by simply buying a one-year-old car.
- Never buy from a dealership. I did that once. Never again. I was astonished at all the junk fees they sneak in. Autotrader, FB Marketplace, and Craigslist are great sites for private sales.
- Research maintenance and repair costs. Do some research for any specific vehicle you are interested in buying. Consult your local independent mechanic. You might be surprised to discover the extreme cost variations in maintaining different types of vehicles (Eg: Volkswagens vs. Hondas).
- Budget for repairs. Set up a sinking fund for repairs if your car isn’t under warranty, whether they’re needed every month or not. This prevents you from receiving an unexpected bill for unplanned maintenance. You’ll have the cash on hand to get that puppy fixed!
- Research loan costs. If you have to get an auto loan, don’t just blindly accept what the dealership offers you. Do your due diligence first! Don’t be afraid to shop around and negotiate for the best terms.
- Don’t spend $50,000 on a car! Think about the cost of a new car…is it really wise to drop 30…40…or even $50,000 on a car? The higher the price, the quicker the value drops. Ponder what you truly need a vehicle for. Could you get a reliable set of wheels for $10,000 to $20,000? Yes!
- Think about future needs: The longer you keep a car, the better your ROI will be. So envision your future needs 5-10 years out and see if you can get a car that will serve you (and the family) for the long haul.
If you have to take out a car loan…
For most of us, a car is a necessity. While it’s always advisable to pay cash for a car, I realize that is not possible for many folks. However, try to save as much as you can to minimize any potential loan debt. Aim to keep total auto costs, including your car loan payment, within 20% of your monthly take-home pay.
As far as loan terms, try shooting for four years or fewer, preferably with at least a 20% down payment. If you can’t pay it off in three or four years, you probably can’t afford the car to begin with. Be smart and avoid splurging on a Mercedes-Benz when a dependable Toyota will get you where you need to go.
The Bottom Line:
Purchasing a vehicle should not be done on a whim. It’s a major financial commitment—for many of us, one of the biggest decisions we’ll ever make. While many people focus on sticker price or the monthly payment, they often overlook the hidden costs of owning a car.
Even if your car(s) are paid off, you will still pay thousands for the privilege of owning them. If you are a two or three car household, can you get by with one fewer? That’ll save you a ton! If your city is conducive to walking and offers public transportation, I would encourage you to take advantage of the opportunity.
Before buying any car, do your research to properly plan and budget how much it will really cost to own those shiny wheels.
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