How Much Does it Really Cost to Buy a Car?

by Jim Thompson | Last Updated: January 11, 2021

There are many expenses that come with car ownership. Things like insurance, fuel, tolls, and maintenance can be pricey, but the largest expense comes in purchasing the car to begin with. A little bit of money savvy can help keep this cost affordable.

The Cost of a Car Loan

Unless you’re paying cash, the price of a car is far greater than the one shown on the sticker. When you finance a car, the final price of the car includes not only the sales price but all of the interest accrued on the loan. It is important to remember that with very few exceptions cars are not an investment. Be sure to calculate the true cost of the car before you decide if it is really worth it.

Breaking Down the Costs

Down payments

Naturally, the larger the down payment you can make, the smaller your loan will be. A larger down payment means that, in the long term, you will pay less interest, keeping your total cost down. Some lenders will allow you to make a deferred down payment. This is, on one hand, a benefit as you are in essence borrowing less money but, on the other, you will in effect be making two payments during the first part of your loan period.

Trading in a car is another way to increase your down payment. It is very important as you enter negotiations that you have a good idea of the true value of the car you are trading in. Many dealers will offer you far less than the actual value of your trade-in and thereby diminish your down payment. This will result in a larger loan and more interest paid by you.

Interest Rates and Length of Term

It is important to remember that people lend money in order to make money and, as with any enterprise, they want to make all the money that they can. Shop carefully for your auto loan both in terms of interest rate and the length of the repayment period. A lower interest rate over a longer period may wind up costing you more than a higher rate over a shorter period. Using a car loan calculator will be a great help in assisting you to make the decision of what loan is right for you.

Another Cost to Consider

Most states require that drivers carry liability insurance on their automobiles. If this is the type of insurance you are currently carrying, be prepared for your rates to go up if you finance a car. Most lenders require that their loan is protected by comprehensive and collision coverage so that they are protected if anything happens to the car during the repayment period. Be sure to check rates for these additional coverages before shopping for your new ride so that you can make a good decision about the car you are purchasing.