Most of us need cars to get to and from our jobs, campuses, activities, and homes, but few of us take the time to really think about the affordability of car ownership.
Should you buy or lease a car? Experts are divided on the best option for drivers who want to save money without sacrificing safety and convenience of personal transportation. On one hand, leasing a car is a great way to have a new car in your driveway with little to no down payment upfront. On the other hand, owning your own car gives you an asset (albeit a depreciating one) that you can later sell for a return of some of your money rather than just giving the car back to a dealership.
Contrary to popular belief, leasing a car isn’t automatically a terrible option, however. The depreciation on a newly purchased car can be so immense that folks who don’t plan on keeping the car more than a year or two might be better off with a short-term lease instead of buying a car.
Rather than just shrugging off car-related expenses as an unfortunately necessary part of life, check out these hidden costs of car ownership to determine if there are any areas where you could be saving money:
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Hidden Costs of Car Ownership
Of course, there is much more than just value and depreciation to consider when deciding whether to buy a car, such as insurance premiums, repairs, pre-payment premiums, and more:
Car Value Depreciation
Value plays a major role in financial considerations related to car ownership. According to Consumer Reports, depreciation is the biggest cost associated with owning a car, accounting for approximately 57% of the ownership costs within the first year alone. This means that the moment you drive a new car out of the dealership to your home, the car is already losing value. And, if you were to sell it next week or next year, you would receive far less money than you paid for it.
One of the biggest issues with cars is that almost all of them depreciate over the course of ownership (unless you own a rare, collectible car). For instance, if you buy a new car, it will lose approximately 11% of its value the moment you drive it off the lot. Around the five-year mark of owning that car, it will be worth about 37% of what you originally paid for it (based on Edmunds’ research). Yikes! So that car you paid $20,000 for when you bought it new five years ago would be worth just $7,400 today.
Depreciation comes from the general wear and tear on the vehicle and the mileage you rack up on the odometer so it’s not necessarily a hidden problem, but far too few car owners are aware of just how much their cars will depreciate over time. This is why buying a used car is generally a better idea, because you won’t have to account for this much depreciation when you buy it from someone else.
Unless you plan to drive your car until the wheels fall off, depreciation is a major consideration in the total cost of your car. Depreciation isn’t something you actually pay for; it’s about how much you get back when you sell your vehicle. Not all cars depreciate at the same rate. A car with a higher resale value ultimately may cost less because you’ll get more cash when you sell it. ALG provides depreciation ratings to help you compare models.
Depending on consumer demand and market conditions, some makes and models of automobiles depreciate faster or slower than other cars. Be sure to consider depreciation when researching new cars you might want to buy.
Unless your auto insurance company offers some kind of roadside assistance service in your policy, you’ll likely have to purchase additional protections for your car through AAA or related roadside companies to avoid getting stranded in the event of a flat tire or smoking engine.
Roadside assistance membership can help you save money if you’re ever locked out of your car (for instance, AAA typically offers 3 free key retrievals every 12 months) or need someone to tow your car to the nearest auto repair shop after a highway accident. Without any roadside assistance protection, you risk having to pay for these services out-of-pocket, which can be quite costly, even if they rarely happen.
When you buy a car, you not only have to pay a sales tax on it (in several states, but not all), but you also have to pay interest on an auto loan (unless you pay for the vehicle with cash). Choosing an auto loan can be especially tricky for anyone with less than excellent credit because you could face steep penalties in the form of higher interest rates in order to secure your loan.
Currently, the national average interest rate for auto loans is 4.21% (for a 60 month loan), but they can go as low as 1.99% or as high as 9-10% for car buyers with limited or poor credit histories. This means that while the final purchase price of the car is $20,000, you’ll end up paying $22,214 by the 60-month mark (assuming you get the average 4.21% interest rate).
Along with rebates, dealers and manufacturers also offer special financing incentives on some vehicles. You also might find competitive interest rates on auto loans from outside lenders, such as your bank or credit union.
How much could a low-interest rate save you? Let’s assume you finance a $20,000 car over 60 months at a 5% annual percentage rate. You’ll pay $2,645 in interest. Now, let’s say a competing model with the same sticker price offers 2% financing; choose this one, and you’ll pay only $1,033 in interest. That’s a savings of $1,612 over five years.
The requirements for emissions testing and the average cost of a smog test vary by state. However, CostHelper estimates smog tests cost between $30-90 (though some areas may provide free testing). Emissions testing may be required every 1-3 years depending on the state where your vehicle is registered, and if your car fails the test, you could end up paying anywhere between $100 and $3,000 or more for repairs in order to pass your next inspection.
Tire Maintenance & Replacement
Tires are some of the most important parts of the vehicle and maintaining/replacing them can be expensive if you don’t find ways to keep costs down. Tire rotations can cost between $25-40 (not including labor costs), and the average cost to replace all four tires on your vehicle ranges from $525 to $725 (depends on the quality of the tires and the type of tires needed for your particular vehicle). You’ll also need to account for potential one-off replacements for flat tires that can’t be repaired (though nail removal services – which cost about $10-30 – can help you avoid buying a new tire altogether).
Whether you’re dealing with routine oil changes, a broken belt or a blown tire, putting money into auto upkeep is inevitable, especially after its warranty expires. How much money depends on the car. Reliability is important, as a car that breaks down more often will cost you more in repairs. And, as a rule of thumb, high-performance sports cars and European luxury models tend to have higher costs because of the specialized knowledge and parts required to maintain them.
If you currently use public transportation or a bike, then parking might be a new expense for you. Whether your landlord charges a monthly fee for parking spots or you need a parking permit for working or traveling in high-density areas, you should include parking fees in your monthly car budget to account for this additional expense.
Car Insurance Premiums
Did you know that your credit history could play a role in determining your car insurance rates? Since insurance companies are concerned with risk, credit scores are sometimes taken into account to calculate the risk of a driver potentially filing a claim. While car leasing options also typically require a credit check, don’t assume that buying a car outright with cash will help you avoid the credit check.
Instead, go into the car buying process under the assumption that your credit will be checked regardless of where you ultimately purchase the car. This means that a poor credit score could cost you a lot of money on car insurance if you don’t work to improve it, so don’t let this hidden cost of car ownership drain your wallet.
Differences in Car Repair Costs
Car repairs are another major expense involved in owning and driving cars. While there are many ways to feasibly save money on car repairs, some car brands (especially luxury brands such as BMW, Mercedes, and Porsche) may cost more to repair than others, simply because the parts cost more (and are sometimes less readily available).
Thus, if you upgrade from an older Ford to a brand new BMW, you could expect to pay quite a bit more money to repair the same item simply because of the car’s brand and presumably higher quality parts.
According to the Federal Trade Commission, it’s important to watch out for prepayment penalties on loans, including auto loans. Although it seems contradictory to charge people money for paying off debts sooner rather than later, early payoff fees exist to ensure auto loan providers still get some form of payment from their borrowers, whether it’s interest or fees.
However, not all auto loans come with pre-payment penalties, so be sure to ask whether your specific loan has the fee embedded in your contract before applying for the loan.
Owning a car can be financially risky, but as long as you’re aware of the costs – both obvious and hidden – before proceeding with your next big auto purchase, your wallet will be better off as a result. Alternatively, if the hidden costs of car ownership – such as higher interest rates or auto insurance rates imposed on drivers with poor credit histories – outweigh the benefits, then leasing a car wouldn’t be a bad option, either.
It’s important to evaluate several factors before deciding which route to ultimately pursue, including how long you plan on keeping the car, what is your current budget for the car and its ongoing expenses, what type of car do you need/want, and whether you would like to pay it off early if the opportunity arises.
Search for Rebates
Don’t settle on a make and model until you check out any special deals that may be offered by the manufacturer or your local dealer. These bargains go by many names — rebates, cash-back incentives or bonus cash — but they all mean “discount” to you. Some automakers have been offering rebates of up to $6,000 on certain models, which should weigh heavily in your decision. Keep in mind that big incentives also may limit your ability to negotiate the price. These deals also can change month to month.
Insurance costs vary widely depending on your age, location and driving habits, but the type of car you drive matters, too. Typically, insurance companies base their premiums on the experiences of millions of other drivers. So you might pay more to insure a vehicle that has shown to be in accidents more often, costs a lot to repair or is frequently stolen. If you’re close to making a decision, call your insurer for a quote. You also can find insurance loss data for hundreds of vehicles at the Insurance Institute for Highway Safety.
Factor in Fuel Costs
Choosing a fuel-sipper over a gas-guzzler can make a huge difference in your long-term costs. According to the U.S. Department of Energy’s site fueleconomy.gov, a vehicle that gets 30 mpg will cost $813 less to fuel each year than one that gets 20 mpg (assuming 15,000 miles per year and a fuel cost of $3.25 per gallon). Over five years, the savings grow to $4,650. The site allows you to calculate your own costs and compare the fuel efficiency of various cars.
Is Owning a Car Worth It?
Hundreds of millions of people around the world own and operate cars on a daily basis, so obviously, cars are inevitable components of many people’s lives. However, if you don’t need a car for work or travel (folks in urban areas with good public transportation might be better off sticking to the bus or subway), then take the above costs of owning a car into account before heading to the dealership to invest in this necessary, but a depreciating asset.
If you’re concerned about repair costs, consider an extended warranty. These service contracts allow you to pay upfront to offset the cost of covered repairs; the price you pay depends on the vehicle, the extent of the coverage and the plan’s deductible.
Is buying a car right for you? What about leasing one? Do you know the hidden costs of car ownership that can come back to bite you? Are there any I missed?