It doesn’t matter if you’re buying a new or used car, it’s important to understand the financial impact.
Upfront, it’s easy to focus on nothing more than the sticker price. And with the average new car costing about $30,000, price is indeed a key factor to consider.
However, before you sign on the dotted line, you must become familiar with the true cost of owning a car. There’s more to this than what you pay to drive the vehicle off the lot.
Here are some additional expenses to take into consideration when buying a car:
1. Interest on Your Loan
Some people are able to live out the dream of buying a car with cash, but this doesn’t hold true for most. Instead, you may rely on financing to make your purchase.
Unless you’re able to secure a zero percent loan (these do exist), you’ll find yourself paying interest each month.
NerdWallet has a car payment calculator, where you can plug in your car price, down payment, interest rate and term. Not only does this spit out your monthly payment, but it also displays the total interest paid over the life of the loan.
2. Insurance Costs
Regardless of where you live, you need to understand the car insurance requirements in your state.
Tip: NerdWallet has a handy table that shows minimum car insurance requirements by state.
There are many ways to save on the cost of car insurance, such as lowering your coverage, increasing your deductible and taking advantage of discounts (such as good driver and multi-policy).
One of the biggest drawbacks of buying a car is depreciation. Even if you take great care of your car, it’s going to lose value over time.
Fortunately, there are a couple things you can do to fight back against depreciation:
- Purchase a used car, since these typically depreciate at a slower rate than newer vehicles
- Purchase a car that is known to hold its value better than the competition
The first point is self-explanatory, but the second one will take a bit of research on your behalf.
Every year, Kelley Blue Book shares its “Best Resale Value Awards” list. You can search by brand, overall top 10 winners and category winners to find out which cars are more likely have to high trade-in or resale value.
Researching which cars tend to have the best reliability could also be helpful. The less time your car spends at the mechanic to fix bad parts, the better. Consumer Reports keeps an up-to-date Guide to Car Reliability that can find cars that have a good record of long-term performance.
4. Fuel Costs
You can use the U.S. Energy Information Administration website to see national and regional average gas prices. As of July 20, 2020 the national average cost of a gallon of gasoline is $2.19/gallon (regular).
Depending on how much you drive, it’s not out of the question to spend hundreds of dollars per month on fuel alone.
It’s important to consider this expense when buying a car, as fuel economy numbers greatly vary by model. If this is a determining factor for you, here’s a list of the most fuel efficient vehicles.
5. Maintenance and Car Repairs
It goes without saying that you never want anything to go wrong with your vehicle. Unfortunately, as your car ages, there is a greater chance of this happening.
Even if you don’t run into any mechanical issues, you still have to pay for basic upkeep. This includes everything from tires to brakes to oil changes.
If you find yourself facing an expensive auto repair such as a catalytic converter or water pump replacement, you don’t want to wait around to take action.
The first thing you should do is see if it’s covered by an active warranty (either standard or extended). Whether it’s under warranty or not, you’ll need to take it to a mechanic to get fixed. You can protect yourself from overpaying for repairs by following some tips for choosing a car repair shop.
So, How Much Does it Cost to Own a Car?
The true answer is: it depends. Aside from which vehicle you pick, several other factors can influence your cost to own a car:
- Interest rates affect car loan payments and vary for each person based on credit history, the length of the loan and more.
- Insurance costs vary by state and are influenced by driving history and a host of other factors.
- Depreciation will vary with the type of car you own (and how long you own it for)
- Fuel costs vastly differ based on the type of vehicle, how often it’s driven and local gas prices.
- Maintenance and car repairs are also primarily influenced by the type of vehicle
But here’s an example of what it’ll cost to own a car that costs $20,000. Let’s start by using NerdWallet’s car payment calculator we referenced earlier using the following inputs:
Credit score range: “Prime” (661-780)
Approximate purchase price: $20,000
Trade-in / down payment: $2,000
Estimated interest rate: 4.5%
Number of months for loan term: 48
Which looks like this:
Amount paid over life of the loan: $19,702.
According to NerdWallet’s 2020 rate analysis, the national average cost of car insurance is $1,427 per year. The average total insurance cost for four years (to match the term of the auto loan) is $5,708.
Running total: $25,410
We’ll skip depreciation in this example and jump to fuel costs. We’ll assume your vehicle gets good gas mileage and use 30 miles per gallon for this example. If the national average is $2.19/gallon (regular) like it is in 2020 and 12,000 is generally considered a norm for yearly driving, that would bring an estimated fuel cost of about $874/per year [(12,000 / 30) x $2.186]. Over four years, that’s $3,498.
Running total: $28,908
This is an estimated total cost for owning and insuring a car for four years. But cars require regular maintenance such as oil changes, tire rotation, replacing old parts and more. Since this is a new car, we’ll assume it costs less to maintain this car than most older cars. Using NerdWallet’s guide to car maintenance costs, we’ll estimate that basic maintenance will cost $100 per year for the first four years. Keep in mind that this cost can vary widely based on the type of vehicle, how often it’s used and where it’s driven.
Estimated final cost of owning and maintaining this car for four years, not including depreciation or the cost of an unexpected major repair: $29,308.
Not only does it cost a lot of money to buy a car, but there are many other expenses that can pile up as the years go by.
Before making a purchase, list out all the costs and personalize the variables that could come into play, similar to what was shown above. Customize your own list based on the car you are looking to purchase to make sure it will fit into your budget.
And if the time comes when you need money to pay for major repairs, consider a personal loan as one of your options.