What Can I Afford?
While our online guide may give you a idea of what
a car costs, they don't tell you the total cost of owning a car. Car costs vary based on
the options, the terms of the loan, the mileage (if it's used or leased), the insurance,
driving habits and current market values.
The Money Management Institute in Illinois attempts to figure the average cost for
owning a car. In its booklet "The Automobile Dollar," it calculates the total
"fixed" costs (insurance, license fees, registration and taxes) plus the total
"flexible" expenses (gas, oil, tires and maintenance) to be $172.75 per month or
$2,073 annually, which is just under 14 cents a mile if you drove a 1990 car for 15,000
miles for each of four years. This monthly charge is in addition to any loan
payment you've agreed to.
The cost is based on owning a "composite" vehicle this is an
average determined by combining the characteristics of all the vehicles the institute
looked at. The result may be like merging an elephant, a woodchuck and a shrew to come up
with a "composite animal." Your best bet for judging car costs is to list your
own costs, as follows:
down payment (first month only)
Figuring It Out
So how do you figure out how much owning a car will cost you? The answer can be found
with research and a little guess-work. Fixed costs will be the same regardless of whether
you drive just twice a week to pick up groceries or drive an hour to and from work every
day. Flexible costs increase with the mileage and wear and tear on your car.
If you will take out a loan for a car, you'll pay a percentage of the car's cost up front
as a down payment. Finance companies usually require a down payment because they like to see
you put up some of your own money to demonstrate your commitment to the transaction.
Rebates, sometimes offered to consumers by car manufacturers, can help you make the
down payment if you don't have the cash. Rebates are usually well advertised.
Your Loan Payment
Once you determine the interest rate you'll pay for a loan, log the monthly loan payment
and the total annual payment into the preceding chart. If you plan to finance options or
extras such as electric windows, extra speakers, extended warranties and credit life
insurance, add these to the loan payment. (Read about extras in
Credit unions frequently offer the lowest rates on loans, but car manufacturers and
finance companies offer loans, too. Car dealers may also offer to provide financing.
Sometimes you'll pay car dealers extra interest for this one-stop shopping convenience.
How Do You Get a Loan?
Getting a loan is easy if you've taken care of your bank or checking account. You don't
need a long credit history. Financial institutions will look at the following items when
considering whether or not to grant a loan:
a pattern of meeting financial obligations,
more than one year at the same job, and
no more than half of your gross income
committed for fixed expenses such as rent, loans and credit cards.
Having all of these is not always necessary, according to lenders.
If you have your loan payments automatically deducted from your checking account, you
may be able to get a discounted interest rate. The automatic deduction cuts down on the
lender's administration, so your lender may be willing to give you a break.
If you don't meet the above profile, you still may be able to get a loan. If you have a
lot of cash on hand and have found a good deal on a car, you may be able to get a loan for
the balance. But if you don't have much cash and you have a bad habit of bouncing checks
or missing other bill payments, you'll need to discuss with your lender how to clear your
Establishing good credit can be as easy as paying your bills on time for six months.
Lenders typically want to help you get a loan. Establish a relationship with a loan
officer, and tap into his or her expertise.
Be wary of finance companies that offer loans to high-risk individuals who are
considered "unbankable." You'll pay much higher than average interest rates at
Questions to Ask About Your
1. What's the percentage rate I'm paying?
Always look at the annual percentage rate. It may differ from the face rate of the note
if you are buying and financing extras.
2. What's the grace period for my monthly payment?
3. Is there a late charge after 10 days? 30 days?
Length of Loan
Several years ago, loans were usually three years in length. But loans are now
typically five years in length to spread out the higher cost of a vehicle over a longer
period of time.
If you plan to buy a new car before you pay off your current car loan, you'll end up
paying two car loans at once. To keep from incurring high debt, plan to keep a car until
you've paid off the loan.
A Loan Turns You Upside Down
When you finance a new car or truck, you'll most likely be "upside down" for
much of your typical five-year loan. That means a few years down the line you will
probably owe more for the car than the car is worth. This is due to depreciation.
Knowing that you won't really own your new car until it's very used is an uncomfortable
realization for some people. It's also one reason to consider buying a used car. Leasing
is another option for those who don't care if they ever own a car and would rather drive a
newer car all the time.
When you take out a loan, the lender owns the car, not you. So if you lose your job, are
hurt in an accident or otherwise can't make your loan payments, you risk having your car
"repossessed" taken back by the finance company. In that case, you won't recoup
a penny of the payments you've already made. In addition, you may have to pay a
"deficiency judgment" the difference between what the finance company sells your
car for and the loan amount. Because the finance company is only obligated to sell a
repossessed car in a "commercially reasonable manner," it may auction the car
off at less than its retail value.
For example, if you have $18,000 left to pay on your car when it's repossessed, and the
finance company sells the car for $16,000, you have to pay the finance company $2,000. The
$2,000 is the deficiency judgment. Adding insult to injury, you'll also have a poor credit
rating as a result of not paying your loan, which means you'll have trouble buying a
To avoid the unpleasantness of repossession, call your lender immediately if you don't
think you'll be able to make a loan payment within the grace period. In many cases, the
lender will try to figure out a payment plan that you can stick to. But if you don't call
right away, the lender may be less forgiving.
Repossession Can Happen Quickly
companies normally aren't obligated to send letters warning you that your car may be
repossessed. While they usually write first to inform you of a delinquent loan, they may
have a right to repossess your car if your payment is even one day late following
the grace period.
Loans for used cars are similar to loans for new cars, except that lenders generally
finance no more than 80 percent of a used car's value. This total value is based on the
"National Automobile Dealers Association's (NADA) Used Car Guide" or "blue
book." And typically you'll pay a higher interest rate on a loan for a used car than
for a new one.
Once you've narrowed down the car models you're considering, call several insurance agents
to ask for insurance price quotes.
Insurance rates always vary based on age, sex, marital status, driving record, where
you live, the number of miles you drive to and from work and the number of miles you drive
annually, as well as your vehicle and its age and value. In short, if you're considered
low risk, you'll pay less. If you're, say, a married couple with a teenage son at home,
you're considered a high risk and will pay more than average.
In Texas the minimum insurance you are required to carry includes:
$30,000 per person and $60,000 per accident
for bodily injury
This covers claims against you in addition to your legal defense if your car injures or
$10,000 property damage liability
This amount is paid for claims and defense costs if your car damages another person's
$40,000 for personal injury protection
This covers your medical costs if you are in an accident.
$25,000 per person and $50,000 per accident
for uninsured/underinsured coverage
This pays the medical expenses of those in your vehicle in the event they are injured
by an uninsured or underinsured motorist.
The following are also required by lenders for the duration of a car loan:
This pays for damage if your car is in an accident.
Comprehensive physical damage insurance
This covers damage if your vehicle is stolen or damaged by fire, flood or another
Added Insurance to Consider
Pay for more insurance? Yes. You may want more than the minimum that's required,
Medical payments insurance
This pays for medical expenses of the driver and passengers in your car who are injured
in an accident.
If your car stalls or is in an accident, towing is covered.
Car rental insurance
When your car is being repaired, you can collect insurance to pay for a rental car.
License Fees and Tax
Call it a relief if you want: Here are two fees that are not negotiable! Sales tax! And
the state has set licensing fees for the type and year of each vehicle.
Fixed costs are the same whether you travel 30 or 3,000 miles a month, but flexible
costs are tied directly to your use of the vehicle. These are costs for gasoline, oil
changes, car washes, protective maintenance, periodic repairs and depreciation.
The depreciation depends on the value of your car, which is influenced by its age and
the number of miles you've put on it. You'll have to guess a bit on this cost. Determining
other flexible expenses is easier, especially if you've already owned a car. If you've
never owned a car, however, consult a book like "The Complete Car Cost Guide,"
published by The Intelligent Choice Information Company in San Jose, Calif., for
Fill 'er Up
To figure how fast you'll empty your wallet by filling your tank with gasoline, first
determine how many miles you drive per month. If you haven't owned a car, you'll have to
make an educated guess. Then ask a dealer or consult a car book to determine the gas
mileage of the car you're considering buying.
1,000 miles ÷ 30 miles per gallon x $1.30 per gallon of gas. Rounded off,
that's 33 x $1.30, which equals $42.90 per month. (Multiply by 12 for the yearly gas
expense. In this example, you would pay $514.80 for gasoline for the year.)
Eight Ways to Lower Your
The Insurance Information Institute in New York offers
the following tips to reduce your insurance payments:
1. Comparison shop.
Shop for both fair prices and excellent service. Narrow the field by asking friends and
relatives about their rates and checking the survey in the back of this guide for an
estimate of rates.
2. Ask for higher deductibles.
Deductibles are the amount you pay out of pocket before your insurance company covers a
claim. By increasing your deductible from $200 to $500, you could reduce your collision
costs by 15 percent to 30 percent.
3. Drop collision and/or comprehensive coverage on older cars.
For cars worth less than $1,000, it may not be worthwhile to carry collision or
comprehensive coverage. Your deductible may be equal to or more than the amount you pay
for this coverage.
4. Eliminate duplicate medical coverage.
If you have health insurance already, you may be duplicating your coverage by paying for
medical coverage on your auto policy.
5. Buy a low-profile car.
Cars with high incidences of collision or theft, or those that are associated with a high
rate of injury, may cost more to insure than those considered safer or less sought after
by thieves. The Insurance Institute for Highway Safety can send you a report comparing
more than 100 cars' rates of collision, injury and theft. To order a report, mail a
self-addressed, stamped business-sized envelope to: HLDI, P.O. Box 1420, Arlington, VA
22210, and request the "Highway Loss Data Chart."
National Highway Safety Administration Online go
6. Take advantage of low-mileage discounts.
Some insurers offer discounts to motorists who drive less than a predetermined number of
miles per year.
7. Find out about automatic seat belt or air-bag discounts.
You may receive a discount for having these safety devices.
8. Ask about other discounts.
Other possible discounts may be given for owning more than one car, having no accidents in
three years, being more than 50 years old, taking driver training courses, installing
anti-theft devices, having anti-lock brakes, being a nonsmoker and even being a good
From the Insurance Information Institute, New York, NY. For more information call
Tires, Maintenance and Repairs
Finally, figure in the expenses of buying new tires every few years and paying for
general maintenance every year. Maintenance may be as simple and inexpensive as quarterly
oil, fluid and filter changes for the first few years you own a new car. If you plan to
buy a used car, you'll want to set aside more money for maintenance and repairs.
An Appreciation for Depreciation
While not an out-of-pocket cost, depreciation is the biggest expense you'll have on an
automobile, especially a brand-new one. Depreciation makes up more than half the cost of
owning and operating a new vehicle.
A new car can lose between several hundred and several thousand dollars in value the
minute you drive off the dealer's lot. About 20 percent of depreciation costs occur within
the first year. Even so, you really won't feel the sting of depreciation unless you decide
to sell your car soon after you buy it.
It's impossible to know exactly how much a car will depreciate because so much of its
value is wrapped up in its popularity. But the "blue book" will give you an
idea, as long as this isn't the first year the model has been sold. Look up previous
years' models to see how they've held their value.
Tips for Better Resale Value:
1) Avoid offbeat or less
well-known makes and models. Remember the Pacer? The Gremlin? The Fiero? Where-oh-where
are these today? Select a popular, highly regarded model or a car from a respected auto
maker that will virtually be guaranteed to be well-regarded years down the road.
2) Choose a car from an auto
maker that doesn't change its body style every year or so. If you're bent on buying a
fashion-forward style, buy it soon after it's first marketed.
3) Especially in Texas, a good air conditioner is a must
for raising resale value. A high-quality sound system also heightens the value.
Next Chapter: "Hit the Books before the Accelerator"