What Are the True Costs of Car Ownership?

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You've found your dream car on an auto dealer's website and used their calculator to estimate your monthly payments. Just $400 a month for that red convertible you've always wanted? You're ecstatic, and ready to sign the paperwork. Not so fast. The monthly car payment you see is not the only cost to think about. To calculate the true cost of owning a car, you also need to factor in costs like car insurance, registration, maintenance and fuel. Here's a guide to determining the actual cost of car ownership.

How to Calculate the Total Cost of Owning a Car

The true cost of owning a car is much different than your monthly loan payment. To calculate a vehicle's real cost of ownership, consider the following expenses:

  • Financing costs: The interest on your car loan can add significantly to the total cost of ownership. A longer loan term may lower your monthly payments, but you'll ultimately pay more in interest than you would with a shorter loan. According to Experian's State of the Auto Finance Market for the second quarter of 2020, the percentage of new car loan terms lasting 72 months—and even longer—has increased since the same quarter in 2019. Even with a lower interest rate on the loan, a lengthy term can drive up your interest costs significantly.
  • Car insurance: States generally require drivers to buy a minimum level of car insurance; most drivers purchase more than that to protect themselves and their vehicles. If your car will be financed, your lender will almost certainly require you carry a level of coverage above what's legally needed. Before you buy a new car, visit car insurance websites to get an idea of how much the vehicle will cost to insure. If you have recent accidents or serious moving violations, your insurance premium could be very costly.
  • Maintenance and repairs: Factory warranties on new cars cover repairs—typically for a certain number of years or miles driven, whichever comes first. Although some luxury cars' warranties include free scheduled maintenance such as oil changes, most car warranties do not, so you'll need to budget for recommended maintenance. Keep in mind that as your car gets older and the number of miles on it climbs, it's likely to need more maintenance and repairs. If you drive a lot, you'll need more frequent maintenance as well.
  • Fuel or electricity: Whether your new car is gas-powered, electric-powered or a hybrid, you'll need to take fuel or electricity costs into consideration. You can estimate costs if you know how many miles you drive per year, the average cost of gas or electricity, and the car's efficiency.
  • License, registration fees and taxes: Dealers generally roll these costs into your car loan when you buy the car. After that, you'll pay license and registration fees to the state each year; these gradually decline as your car depreciates in value. According to AAA, in 2019 licenses, registration and taxes cost an average of $753 annually.
  • Depreciation: A new car typically loses a big chunk of its value in the first year and continues to depreciate by about 10% annually after that. Depreciation costs car owners an average of $3,334 a year, according to AAA. If you want more detailed estimates of a car's value, use a car valuation service such as Kelley Blue Book or Edmunds.

How to Minimize the Costs of Owning a Car

If the thought of all these expenses has you rethinking car ownership, don't worry. There are plenty of steps you can take to help minimize your costs.

  • Pay attention to warranties. After the manufacturer's "bumper-to-bumper" warranty expires, there may be an extended powertrain warranty that covers the car's major mechanical components. Using your warranty for covered repairs can save you money, but it's important to read the warranty carefully so you know what it includes, as well as any restrictions, exclusions or conditions. For example, you may need to have repairs done at a certain dealership or show proof that you performed all recommended maintenance.
  • Avoid long-term auto loans. The interest on 72-, 84- or 96-month auto loans can really add up. If your budget can handle the higher monthly payments, a shorter loan term can save you thousands of dollars in interest over the life of the loan.
  • Lower your car insurance costs. Shop around to see which insurance company offers you the best rates on car insurance. Talk to your insurance agent to find additional ways you could save. Taking a defensive driving class, installing an app to monitor your driving habits, or increasing your deductible are just a few of the ways you might be able to lower your premiums.
  • Drive safely. Steer clear of risky driving habits such as speeding or slamming on your brakes. They'll put you at greater risk of getting a ticket or having an accident, both of which could mean higher insurance premiums. Aggressive driving can also be hard on your car, costing you more in maintenance.
  • Look for ways to pay less at the pump. Use an app like GasBuddy, GasGuru or Waze to find the cheapest fuel in your area. Check your owner's manual; if the car doesn't require premium gas, you can save by purchasing lower-grade fuel. Joining a warehouse club such as Costco that sells gas or using a supermarket gas rewards program can also cut your gas costs. If you really want to save at the pump, consider buying an alternative-fuel vehicle. AAA reports that the power costs associated with a compact electric car are $596 a year on average, compared with $1,255 you'd spend on gas for a similarly sized gas-powered car.
  • Take good care of your car. Avoid costly repairs by getting your car maintained regularly. Check the owner's manual for recommended servicing intervals. You can save money by learning how to handle simple maintenance tasks such as changing bulbs, wiper blades and air filters. If you're more ambitious, learn how to change the oil or rotate the tires yourself.
  • Drive less. You'll save on fuel and reduce wear and tear on your car by walking, biking or carpooling whenever you can. If you drive less, you may also qualify for low-mileage car insurance discounts.

Tips for Purchasing a Car

Whether you plan to buy a new car or are considering a used car, taking the same general approach to car buying will help you get the most for your money.

Start by reviewing your income and expenses. Taking into account all the costs of car ownership, how much can you afford to spend on a car each month? If you don't have money for a down payment yet, how quickly can you save it up?

After you have an idea of your budget, start researching and pricing cars online. If you're going to buy a used car, check local auto dealers' stock and look at Kelley Blue Book car values to get a price range for the car you want.

Once you have a price in mind, use an online auto loan calculator to assess how different loan terms and down payment amounts will affect both your monthly payments and the total amount of interest you'll pay for financing the car.

You'll have more negotiating power at the auto dealership if you've been preapproved for a loan before you visit. To find the best loan terms, apply for several different auto loans online. Just be sure to do it within a 14-day period. If all your applications are within that time frame, lenders' inquiries into your credit generally count as one inquiry when reported to credit bureaus, minimizing any negative effects on your credit score.

Are you hoping to qualify for those 0% APR offers that auto dealers promote? Having good credit boosts your odds of qualifying for the best loan terms. Before you apply for any car loans, check your credit score and review your credit report for factors that might be dragging it down.

If you don't have good credit, delaying your car purchase until your scores improve could help you get more favorable loan terms and save you thousands of dollars in interest. Paying your bills on time, paying down your debt and using less of your available credit can all help improve your credit score. You can also give your credit score a nudge by using Experian Boost®ø. This free service reports your utility, cellphone and streaming service bill payments to credit bureaus, which can improve your credit score instantly.

Is the Car Worth the Cost?

Calculating the true cost of car ownership can help make sure you buy the right car for you. Should you opt for a cheaper vehicle that leaves more money in your bank account, or stretch your budget to afford a more expensive car? When you know how much you'll spend to keep that dream car gassed up, insured and running smoothly, you'll be better poised to make a smart choice.