Hidden Costs of Buying a New Car

Prepared car buyers know that the true cost of buying and owning a new car involves more than simply a big rebate, a competitive price or an agreeable monthly payment. There are hidden costs as well. In addition to these important elements, the cost of owning a new car is determined by these factors:

• Financing charges, if any
• State and local tax rates
• Tax credits, if any
• State licensing fees
• Insurance premiums
• Fuel economy estimates
• Maintenance and repair costs
• Predicted vehicle depreciation

To ensure that the vehicle you choose provides maximum value at minimum cost, it is important to consider all of these hidden costs when deciding which new car best fits your budget.

Financing Charges

When a person finances a vehicle, a monthly payment is made for a predetermined number of months. The monthly payment amount can vary depending on the size of the cash down payment, the length (or term) of the loan and the loan’s interest rate. Typically, lower interest rates are offered for new cars, while used car buyers must pay a higher interest rate.

To reduce the amount of the monthly car payment, a car buyer can make a bigger cash down payment, extend the term of the loan and find financing with a lower interest rate. Let’s take a look at how modifying these variables can impact the monthly payment for a 2020 Honda Accord EX Sedan with a 4-cylinder engine and a sticker price of $27,770.

Loan Option #1: Zero down, 60-month financing, 5 percent APR = $524 per month

Loan Option #2: $2,500 down, 60-month financing, 5 percent APR = $477 per month

Loan Option #3: $2,500 down, 60-month financing, 6 percent APR = $489 per month

Loan Option #4: $2,500 down, 72-month financing, 6 percent APR = $419 per month

When trying to determine your model or dealership, be absolutely sure that you are comparing vehicles using identical down payment amounts, loan terms and loan interest rates.

Source of values: Loan calculator on Bankrate.com

Leasing Charges

If you are leasing a new vehicle, the equivalent of a financing charge is applied to the formula used to calculate the monthly lease payment. This is known as the money factor. The money factor is not expressed as a percentage, like a financing rate for a conventional car loan. Rather, the money factor is expressed as a very small number that can be converted to a conventional interest rate by multiplying the number by 2,400. The smaller the money factor, the lower the effective interest rate.

Using the Honda Accord EX above as an example, let’s see how a change in the money factor impacts the monthly payment for a 36-month lease with a $2,000 capitalized cost reduction (down payment), a 50 percent residual value (value of the car at the end of the lease) and a limit of 15,000 miles per year. We’ll also add a 7 percent usage tax (sales tax) in our calculation.

The first lease payment is written using a money factor of 0.0029, which translates to a 6.96 percent interest rate. An Accord buyer selecting this deal will pay $476.30 per month for the lease. If this person shopped around for the best lease rate and could obtain one for 0.0024 (5.76 percent), the payment for this Accord drops to $455.08 per month.

When comparing lease payments for the same model between different dealerships, be sure to use the same values for the cash down payment (capitalized cost reduction), the lease term and the annual mileage limit to help you make the best decision. Doing so allows you to identify differences in the price of the vehicle (the capitalized cost) and the money factor between deals.

Source of values: Lease calculator on Bankrate.com

State and Local Tax Rates

In rare instances, buying a car in a different city or county within the same state, or in a neighboring state, can help you save money. However, most local and state governments have laws in place dictating that car buyers must pay sales tax on a new vehicle based on their state, county and city of residence. Such laws are designed to prevent car buyers from purchasing vehicles at dealerships where lower tax rates are in effect in an effort to protect local businesses and government budgets.

If you are considering buying a car from an area outside the one you live in, be sure to carefully examine all potential tax benefits and determine any hidden tax pitfalls resulting from the deal. Also, remember that taxes are based on the selling price, so choosing a less expensive car can lower the amount paid in tax. Find a new car for sale near you

Tax Credits

Plug-in hybrid models and electric vehicles cost more to purchase, but they are also eligible for national, state and local tax credits. These tax credits, combined with lower operating costs, are designed make a hybrid or electric vehicle as cost-effective to own as a conventional gasoline vehicle.

To illustrate, consider the 2020 Kia Optima. It is offered with gasoline powertrains, a gas/electric hybrid powertrain and a plug-in gas/electric hybrid powertrain with 28 miles of electric range.

The 2020 Kia Optima Plug-In Hybrid EX carries a base price of $36,090, while a similarly appointed standard Optima EX Premium starts at $29,990. Apply the $4,919 federal tax credit to the plug-in hybrid and the price effectively drops to $31,171, leaving a price premium of $1,181.

Combine the tax credit for the Optima Plug-In Hybrid with its 41-mpg combined fuel economy rating (compared to the Optima EX Premium model’s 31-mpg combined rating) and the added cost for the Optima Plug-In Hybrid is amortized over 2.3 years according to the EPA’s estimated annual fuel costs (including electricity for the PHEV) for these two cars. The more time a Optima Plug-In Hybrid’s owner spends driving on electricity as opposed to gasoline, or the higher gas prices climb, the sooner the added cost of the car is amortized.

State Registration and Licensing Fees

Each state sets its own registration and licensing fees. Often, these fees are the same regardless of the type of vehicle that is registered and licensed. However, in some states, the fees can vary dramatically depending on a variety of factors, including the vehicle year, purchase price, taxable value, weight, the owner’s driving record, whether or not the car has a lien against it and the owner’s county of residence.

For example, in Arizona, residents are charged $8 for license plates ($8.25 in Phoenix and Tucson), plus a $1.50 air quality research fee and a vehicle license tax assessed at 60 percent of the vehicle’s original manufacturer’s suggested retail price, which the state reduces by double-digit percentages each year as the car ages. Neighboring Nevada charges a flat $33 fee for plates. As a result and with regard to licensing, Nevadans need not consider the price of a new vehicle as a part of their budgeting process, while Arizonans can save money by choosing a less expensive model.

Source: National Conference of State Legislatures

Insurance Premiums

After a car’s purchase price, one of the most expensive elements of vehicle ownership is car insurance. Car insurance premiums are dependent upon numerous factors, including the car owner’s driving record, age, marital status and whether he or she is retired. Additionally, insurance premiums are calculated based upon the car owner’s area of residence, whether or not the vehicle is garaged at night and the number of miles the vehicle is driven annually.

Insurance companies also charge different premiums depending on the type of vehicle to be insured. Insurance premiums vary between different makes and models, and are even variable between body styles and trim levels of the same model. Typically, the more expensive and performance-oriented the vehicle, the more expensive the insurance becomes.

Insure.com offers a handy tool that allows consumers to research and compare average insurance rates for more than 750 vehicles. It also provides a list of the 20 most and least expensive models to insure. Let’s compare the base models of three popular 2019 compact SUVs: the Honda CR-V LX, the Chevrolet Equinox L and the Toyota RAV4 LE.

According to Insure.com, the CR-V costs $1,334 annually to insure, the Equinox $1,403 and the RAV4 $1,439. What happens if a consumer chooses the CR-V Touring with the turbocharged engine and AWD? The annual premium rises to $1,448.

To illustrate the effect of more expensive trim levels on insurance costs, let’s look at the 2019 Mazda CX-5. The base Sport model costs $1,352 annually, according to Insure.com. Step up to the Touring model and the premium rises to $1,374 per year. The top model, the CX-5 Grand Touring, costs $1,405 annually.

When deciding which model to buy, consumers must first investigate the cost to insure the vehicles under consideration. Even after choosing a model, it is advisable to investigate insurance rates between the different trim levels to make the best financial decision. Also, don’t forget that to help save money on insurance, a car owner can increase the amount of the deductible for the policy. The deductible is the amount of money the car owner will pay for repairs and expenses before the insurance company starts to pay.

Fuel Economy Ratings

If the past decade has taught us anything with regard to gas prices, it is that they are unstable. They rise, fall and rise again, sometimes by substantial amounts. Whenever gas prices rise, motorists complain and act as if they are surprised. They shouldn’t be.

According to GasBuddy.com, a website that helps people find the least expensive gas prices in their local areas, the national average for a gallon of regular unleaded fuel is $2.65 as this article is written. Residents of Louisiana are paying an average of $2.26 per gallon, while Californians are shelling out $4.17 per gallon. Because moving to Louisiana is an unlikely prospect for most people not already living there, consumers must carefully weigh their options when buying a vehicle, calculating the savings offered by alternative powertrain choices or the costs associated with upgrading to a larger and more powerful engine.

Let’s illustrate using the 2020 Ford Fusion as an example. The Fusion is sold with a conventional gasoline engine, two turbocharged engines, a conventional hybrid engine, and a plug-in hybrid powertrain.

A 2020 Fusion equipped with a 2.5-liter 4-cylinder engine costs $23,170. The combined fuel economy rating is 24 mpg, which translates to an estimated annual fuel cost of $1,650.

If you choose a Fusion SE with the frugal 1.5-liter turbo engine, the window sticker reads $24,500. The combined fuel economy rating is 27 mpg, resulting in $1,450 in estimated annual fuel pump receipts.

The Fusion SE equipped with a turbocharged 2.0-liter 4-cylinder engine and is priced at $27,090. It’s combined 25-mpg fuel economy rating produces an estimated annual fuel bill of $1,600. This engine improves both the performance and the fuel economy of the Fusion over the base model.

The Fusion Hybrid is equipped with a hybrid powertrain rated to get 42 mpg in combined driving on regular unleaded fuel. The Fusion Hybrid SE costs $28,000 and burns $950 of gas annually.

Finally, the Ford Fusion Energi uses a plug-in hybrid powertrain that runs on both gas an electricity. It has the same 42 mpg combined mpg rating, but it also has an all-electric range of 26 miles and a 103 MPGe rating. The well-equipped Fusion Energi Titanium starts at $35,000 before a $4,609 federal tax credit and its estimated annual fuel cost of both electricity and gasoline is $800.

But there’s more to factor in than just fuel economy. For example, a Fusion equipped with the 2.0-liter turbo engine will deliver more exciting performance than the 1.5-liter engine, but there’s also a slight fuel economy penalty that comes with it. The Fusion Hybrid will have the lowest fun-to-drive factor of the bunch, but also has a significantly lower annual fuel bill than its non-hybrid counterparts.

Source for average unleaded fuel price: AAA

Source for annual fuel costs: EPA based on 45% highway, 55% city driving, 15,000 annual miles and current fuel prices.

Maintenance and Repair

Modern cars do not require as much maintenance and repair as older vehicles did when they were new, allowing many automakers to increase warranty coverage and offer free scheduled maintenance for a limited period following purchase. There is genuine value to car buyers in long warranty programs and free service, and each ought to be considered when choosing a make and model.

To illustrate, consider the 2019 Audi A4 ($38,395). The A4 is offered with a 4-year/50,000-mile warranty and one free scheduled service visit within the first 12 months or 5,000 miles of driving. According to Kelley Blue Book (KBB.com), the 5-Year Cost to Own figure for the Audi’s maintenance and repair is $5,385.

A 2019 Lexus IS 300 ($39,585) includes a 4-year/50,000-mile warranty just like the A4. KBB.com says the 5-Year Cost to Own amount for the Lexus in repairs and maintenance is $4,626.

Though the Audi costs $1,190 less to purchase in base trim, it also costs $759 more to maintain and repair during the first five years of ownership compared to the Lexus making the savings in the sticker price almost a wash.

People who keep cars for a long time will also want to do research pertaining to a model’s long-term projected maintenance and repair costs for when the original warranty protection expires. Good sources for this information include KBB.com and RepairPal.com.

Generally, it is better to buy a car with a longer warranty to protect against large repair bills in the future, and to choose a model that will be less expensive to maintain and repair. Selecting a model covered by a free scheduled maintenance program is less important, but it does ultimately save car buyers money if the purchase price between two models is otherwise similar.

Depreciation

Depreciation refers to the amount of value a vehicle loses each year following purchase, and it impacts car buyers when they decide to sell the vehicle. Some models hold their value better than others, effectively lowering the total cost of ownership when the owner elects to sell.

Let’s look at three popular full-size SUVs in base format: the Chevy Tahoe LS ($49,295), the Toyota Sequoia SR5 ($50,175) and the Ford Expedition XLT ($53,525). According to KBB.com, the Tahoe will depreciate $28,108 over five years, the Sequoia $27,255 and the Expedition $30,745. After half a decade, the Tahoe loses 57 percent of its value, the Sequoia loses 54.3 percent of its value and the Expedition loses 57.4 percent of its value. So while the Sequoia is more expensive to buy than the Tahoe, it also holds its value better than both the Chevy and the Ford.

Because choosing a model that retains more of its original value ultimately puts hundreds and thousands of dollars back into a car owner’s pocket at the end of the ownership cycle, knowing a vehicle’s expected depreciation rate is an important consideration.

Summing Up

Many car buyers focus primarily on price and payment when buying a new car, but there are several additional factors that can impact the overall cost of owning a vehicle. When deciding between different models or trim levels within a model series, it is important to consider these variables when determining which vehicle best fits your budget.

Related Car Financing Fee Articles:

• Financing a Car: Are Taxes and Fees Included in Financing?
• Leasing a Car: What Fees Do You Pay at the Start of a Lease?
• Buying a Car: What Is a Doc Fee?

Editor’s Note: This article has been updated for accuracy since it was originally published.