Buying a car is a rite of passage as an adult, but there is a lot more to it than meets the eye. Even if you’ve bought one in the past, getting a new car can be stressful because you never know what hidden costs may pop up in the process. And hidden costs could be the difference between getting the car of your dreams and you leaving the dealership empty-handed.
When buying a car, it is likely that you will come across numerous hidden costs. And if you don’t budget for these unexpected fees, you may not be able to leave the dealership with the car you want. This is why you need to budget for the hidden costs you’ll experience before buying a car.
Budgeting isn’t always easy, nor is understanding the car purchasing process. Keep reading to find out more information about the hidden costs you will encounter when buying a car and how best to plan for them in your budget in advance.
The Hidden Costs When Buying A Car
Whether you are buying new or used, it can be exciting to walk around the lot of car dealerships and see what all is available for sale. Especially when you find the exact car you wanted, and you check the price tag, and it is within your price range! But before you get too excited, it’s important to know that this price doesn’t include all the charges that come with buying a car.
When you buy a car, there are many additional fees that aren’t included in the sticker price. This is because most of these fees are paid to someone other than the dealer or the maker of the car. Below is a full list of all the hidden costs you may encounter when purchasing a car.
State and Local Tax Rate
Did you really think you could buy anything in this country without giving the government a cut? All states in the United States have a specific sales tax rate when you purchase a car, usually a percentage of the sticker price.
But it doesn’t end there. In most states, you will also need to pay a city or local tax for your car as well as the state tax. And if you are really unlucky, like those living in Arizona and Colorado, you will need to pay a third county or district tax on top of what you are already paying. And these numbers can really add up.
So before you head to the dealership, do a little research on the car tax rate for your state. Then make sure you calculate this as money you will need to have when purchasing the car. This will probably change your budget a little bit, especially if you live in California or Connecticut, where the car tax rate is above 7%.
Registration and Licensing Fees
If you thought the above taxes were bad, just wait until you find out that it doesn’t even include registration and licensing fees for your vehicle! How much it will cost to register and license your vehicle will again depend on the state you live in.
Some states, like Nevada, have a flat rate when it comes to registering your vehicle. And in Nevada, you will only pay $33 plus a service charge based on the value of your vehicle. This makes registering a vehicle in a state like Nevada not a huge dent in your budget if you know what to expect!
On the other hand, in a state like California, registering your vehicle can cost a small fortune. This is because the fee to register a vehicle is $46, but then you also have several additional fees, like the Transportation Improvement Fee, that can range from $25-$175.
You aren’t done there. California, like Nevada, has a fee that is based on the purchase price of the car that can get pricey very fast when you buy an expensive vehicle.
Thought you’d gotten through all the fees for California? Not a chance. California also has a $24 highway patrol fee you have to pay every year when registering your vehicle. And if you buy an electric vehicle, there’s an additional $100 fee for you to get your registration.
This is why it is extremely important that you know what the registration and licensing fees are in your state before you go car shopping. You would hate to spend all your money on a vehicle then find out you can’t keep it because you can’t afford the registration fees in your state!
Insurance Premiums
Insurance is mandatory when owning a car in the United States. And most of the time, the rate you will pay per month is based on the purchase price of the vehicle. This means the more you spend on a car, the more you will pay for insurance.
Of course, premiums differ based on the company you choose, but don’t expect to be paying the same rate for the 10-year-old used vehicle you are currently driving when you upgrade to a brand-new vehicle that is four times the value.
To know what you are working with, head over to your current insurance company and ask them for a quote for the value of the vehicle you are looking to buy. This is also a good time to shop around for a new insurance company if you think you may want to switch.
Financing Fees
Often times when you go to purchase a vehicle, the dealership is more than happy to help you find financing. But they may not always have the banks with the lowest rates, nor is this service always fee-free. Sometimes the dealership may take an additional fee for this service, and sometimes the financing company you choose will as well.
Besides just an upfront fee, you need to look at the interest rates you are being offered, as this is money you will need to pay in addition to the cost of the vehicle each month. And if you select a loan with a longer financing period, this will result in you paying more, even if it makes the payment look cheaper per month.
Before you head to the dealership, it’s best to get pre-approved for financing if you can from your personal bank. This way, you can have time to compare the interest rates to ensure you are getting the best deal. You can always use the dealer-provided financing if it is cheaper, but at least this way, you will be prepared for the interest rates you can expect for your loan.
Maintenance
For those buying a brand-new car, this probably won’t apply to you, but if you are looking to purchase a used car, you will need to expect maintenance as a hidden cost of purchasing the vehicle.
When buying a used vehicle from somewhere like Craigslist or from a friend, it’s always a good idea to have a car shop employee look over the vehicle before your purchase. They can let you know what is running fine and what you can expect to fix. They will do this for a small fee.
If you are buying from a used car dealership, it’s still a good idea to have a repairman look over the car, but usually, the dealership will have already done this for you, and they can let you know what type of repairs to expect and when.
Either way, when buying a used car, you will need to budget and set money aside for possible maintenance that you will need sooner rather than later.
Documentation Fee
A documentation fee is a small fee that a dealership may charge you when purchasing a vehicle. This could also be called a registration fee and is basically how a dealership charges you for putting a car in your name.
This fee varies based on the dealership you choose, but in general, it should be around $200. If it is much more than that, you should ask the dealer about it. If it is extremely excessive, you will want to find the car you desire at another dealer.
When planning to purchase your car, unless you are buying from a friend, you will want to include anywhere from $200-$500 for the documentation fee into your budget. This way, you will be on the safe side, and there will be no surprises when you see the final bill.
Destination and Delivery Charges
Sometimes a dealer will charge you a fee for your car being delivered to the dealer. While this is a fee that is difficult to plan for, you will want to have some extra cash in case you are subjected to it.
When you are given the paperwork to look over the final bill for the sale of your car, look for this fee to see how much it is. Also, be sure you aren’t charged for both a destination AND a delivery charge. It should be one or the other, not both.
Extended Warranty And Maintenance Packages
This isn’t necessarily a hidden charge, but when you head to the dealership to purchase a car, they will likely try to sell you on additional coverage for the warranty of your vehicle.
It is up to you whether you decide to purchase this additional coverage. And for some vehicles, it can be very helpful, especially if you are buying used. But if you do want to buy one of these plans, you will need to include that in your budget ahead of time.
Car warranties and maintenance package costs will largely depend on the value and age of your car, but usually, these fancy packages will cost upwards of $1000. So you definitely need to know in advance if you plan to get an extended warranty for your vehicle or not.
Tires
When buying a used car, make sure you take a look at the state of the tires before you buy the vehicle and estimate how long you will be able to drive on those tires. There are many articles online that can teach you how to estimate the age and wear of tires.
A new car purchased from a dealer should have tires that will last you for a while, but it’s still worth checking just to be sure. And if you are purchasing used, then you will definitely need to include the possibility of new tires in your purchase price. Driving on old and worn tires is dangerous, which is why you should always have money to replace your tires on hand.
The cheapest tires will run you at least $200 for a set of four, and if you want nicer tires, you could find yourself paying $800 for a set. You will need to factor this into the purchase price of your vehicle so you aren’t left with a new, used car that you can’t drive because the tires are nearly bald.
Gas
One thing people sometimes forget when buying a car is how much gas will cost. This is especially important when you decide to buy a bigger car that isn’t a hybrid, as these vehicles have massive tanks that could cost over $100 to fill in some states.
So before you get your heart set on a certain make and model of car, be sure you do a little research. How big is the tank? How often will you need to fill it based on how much you drive? Of course, gas prices fluctuate, so you should estimate high when it comes to the price of gas for the vehicle you expect to get.
When you plan for the cost of gas when buying a car, this may lower the total amount you are able to spend on a car. And this is for a good reason because the last thing you want is an awesome car you can’t even drive. After all, you can’t afford gas!
How Can You Ensure You Get The Car You Want?
If all this is starting to sound a bit scary, don’t worry, as there are still ways to make sure you are able to get the car of your dreams. And the number one way is by budgeting your money in advance.
When you budget your money, this means that you plan out how much you will spend on all of your expenses in a month so that you aren’t left with too many bills and not enough cash. Additionally, budgeting can be used to set aside extra money on the side for something you wish to purchase at a later date.
Envelope Budget
One of the most popular ways to budget is by using something known as the envelop budget. This is where you get an envelope for every cost you spend money on in a month. For example, you would have an envelope for rent, another for your car payment, one for groceries, and so on. And extra money after all bills have been paid would go into an envelope marked “spending money.”
Then each month, when you get paid, you will take your entire paycheck in cash and put the money for each of your bills in the corresponding envelope. Whatever bills you have left in your hand at the end of this process go in the spending money envelope.
When each bill comes up in the month, you use the money from the corresponding envelope. And when something comes up that you didn’t plan for, or friends invite you to an event, you will take money from the spending envelope. When it is empty, you know that you have no more money left to spend.
While this is an effective method when it comes to maintaining a budget, it is also slightly unrealistic as almost everything in this day and age is digital. Pulling out your paycheck in cash when you receive direct deposit is straight annoying. But when it comes to paying all the bills you pay digitally, with cash, well, this is nearly impossible.
Not only that but carrying around envelops of cash can be dangerous and difficult if you are part of a couple. After all, how can you both have the spending money envelope at the same time? This is why the digital envelop budget system was created.
Digital Envelope Budget
This system works just like the envelope budget outlined above, except everything is tracked digitally. Similar to the above, you will first need to develop a budget for yourself, so you know how much you can expect to spend during the month. There are apps for your phone that can help you develop this budget, or you can use an excel spreadsheet.
For this to work, it’s best to have a separate checking account that you plan to hook up to the app or that you plan to use for your digital envelope purposes. You should take out your money that goes to savings before transferring the money from your paycheck to this account. All your bills should be scheduled to be deducted from this account, and you should have a debit card for it.
If you haven’t downloaded a digital budgeting app, now is the time to do so. The best apps on the market will work directly with your bank account, and you should be able to input your budget. Then, after every purchase you make, mark what category it goes in. This will help you to keep track of your spending for each “envelope.”
Shop around a bit for digital envelop budget apps, as some have controls in place that won’t let you spend above a certain amount in a category (ideal for people who struggle with budgeting). While others will send you reminders when you have overspent or are about to, but it won’t stop you from doing so.
The digital envelope budget app you end up choosing will ultimately be the one that fits your lifestyle and spending style best. If you are in a couple, then you will both have to pick the same app, of course, so find one that is a good fit for the both of you.
How To Budget For Car-Related Expenses
Now that you’ve learned how to budget using the digital envelope system, it’s time to specifically discuss how you need to budget for a car to know exactly how much you can afford.
Start with your income after taxes, and deduct everything from the budget you created above. You should be left with your spending money. If you already have a car, you are making payments on. You will want to add that amount to your spending money. Otherwise, this is the money you will have to spend on a new vehicle.
It is important that you do not use all the money you have left in your budget to set aside for a car because what fun would a car be if you can’t drive it to spend time with friends, visit a new location, or eat a meal out? You need to decide how much of your spending money you will wish to part with each month, and this is your car budget.
Use An Auto Loan Calculator
First and foremost, you need to see what type of loan and interest rate you are eligible for. Because if you have to pay a high-interest rate, you will be able to afford much less when it comes to the purchase price of the car. The best way to do this is by using an auto loan calculator.
The cool thing about an auto loan calculator is you can even put in the sales tax percentage for your state as well as the fees you expect for registration to get a good idea of the overall price. Remember that car insurance is not included in this, but you can put in what you want to pay per month, and the calculator will tell you how much you can spend on a car.
It is recommended that you plan to save a few months’ payments for your car in advance before you buy it. This way, you will have extra money to help cover some of the initial costs like registration or for a down payment if needed.
Research Car Insurance
After you have a rough idea of the amount of money you are looking to spend on a car, look through a few different insurance companies and see the policies they have to offer for the value of the car you want to purchase.
Make sure that you can afford both the payment you calculated in the first step, as well as the insurance you discovered in this step. If there isn’t enough money in your spending money envelope, go back to step one and lower the payment to something you can afford with insurance, and do this step again.
Plan for Gas and Maintenance
You also need to have a rough idea of how much gas your car will require on a daily or weekly basis so you can factor this into the money you want to spend. Luckily there are several online websites that you can use to estimate what it costs for you to drive to work, a friend’s house, and your favorite grocery store so you can get an idea.
Make sure the amount you plan to spend on gas fits within the amount you are willing to spend for your car and insurance. If you exceed your budget, then you need to return to the auto loan calculator and lower the monthly payment. You can afford less the amount of gas. Or you need to look into purchasing a more fuel-efficient vehicle.
Maintenance is a bit harder to plan for, but your best bet is to put a little extra money into your savings account each month for car repairs. Or, create a special savings envelope in your budget just for car repairs. That way, when something does happen, you will have the money to get it fixed, and you won’t be stranded by the side of the road.
This extra maintenance money needs to come out of the same pile you’re paying for your car, insurance, and gas out of, so if you’ve exceeded that dollar amount by putting aside money for maintenance, it’s time to once again lower the money you can afford for a monthly car payment and calculate again.
Take Extra Money From Somewhere Else
Maybe you’ve made it this far and found that the money you have available for a monthly payment only buys you a car you wouldn’t be caught dead in. Well, you do have a couple of options.
You can take extra money from another spending envelope, such as your vacation savings envelope. You will have less to spend on vacations when you do this, but it might be worth it for you to have your car.
You can also take from your entertainment or clothing budget, resolving to spend less in these categories by shopping for used clothing and skipping the monthly movie theater visits. This may be a struggle for you, but remember this is your choice and that you could always buy a cheaper or used car if you’d rather not budget money this way.
Conclusion
When it comes to buying a car, whether you purchase a new or used one, you will be bombarded with fees. The best way to deal with these fees is by being prepared in advance and saving the proper money to cover them when the time comes.
Saving money isn’t always easy, but if you use the digital envelope budget system, you will be surprised by how easy it is to spend within your means. And when you are ready for your car purchase, you will know exactly how much money you have available to spend on the new vehicle of your choosing.
Sources:
https://www.factorywarrantylist.com/car-tax-by-state.html
https://www.ncsl.org/research/transportation/registration-and-title-fees-by-state.aspx
https://cars.usnews.com/cars-trucks/when-to-replace-tires