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Understanding the Cost of Owning a Car

If you are considering buying a brand new car, it is important to be fully aware of the true cost of owning a car which can be significant depending on how old you are, where you live and the car you’re interested in. It is absolutely essential to know exactly how much you can afford on a monthly basis before you buy. The price tag of the car is just that, and it is only the beginning. From the moment you pay for the vehicle onwards, the next few years are going to be filled with additional expenses that will fundamentally affect how much cash you have available to spend on everything else.

The cost of owing and running a brand new car has come down over the years especially if you are in the middle or later half of your life (when car insurance tends to be much cheaper) and live in a low-crime region. It is however important to plan ahead and ensure that your budget will stand up to the test of owing a new car before you make such a huge financial commitment.

Here is a list of the most frequent expenses that you will incur after buying a new car. You need to work out how these bills will affect your current lifestyle, including regular utility bills and essentials like food, children’s bits, gym, leisure activities, mobile donations, birthdays, for plants, presents, hobbies, dentist, festivals, movies, vitamins, dry cleaning, etc.

The Cost of Owning a Vehicle:

Monthly Payment

It is important that you select a loan term that fits your budget and allows you to efficiently prepare for the monthly payments. Many experts advice that your monthly car payments should not be more than 20% of your monthly income (take home pay). Once you have come up with a monthly car payment you can afford, decide if a 2-year, 3-year or 4-year loan is acceptable, and what loan amount it provides.

One of the first things you’ll want to look at is what interest rate you’ll be paying on your loan. Obviously, the lower the rate, the more the car will fit into your budget. Long term loans are suitable for tight budgets. It might be more expensive on the long run, but this will allow you to spread out your payments more evenly. Some dealership websites have a handy car loan calculator; use it to quickly work through these numbers.

Knowing the exact down payment you can afford to put down allows you to work out the remaining balance. Note that shelling out extra amounts for your monthly payments will shorten the duration of the loan. In some countries, dealerships charge a doc fee too. Find out what the doc fee will be. You will also have to pay a license plate (registration) fee which will vary.


The consequences of driving without appropriate insurance coverage can be financially devastating. It doesn’t even bear thinking about. It is not something you can afford to be without even if you live in an area where it is not mandatory. At the very least you should be insured against theft and collision. The cost of insurance will depend on your age, your zip code or post code, the model and year of your car and your driving record. Sometimes being an AAA member will lower your rates; it’s worth looking into.

Young drivers face some of the highest car insurance premiums around. Keep in mind that some insurance companies give better rates for certain kinds of customers, the firm that gives the best rates for people in your age range with two speeding tickets driving a pickup doesn’t mean that’s the best firm for a 27-year-old male with a clean record, driving a hybrid. It is important to shop around.

Furthermore, if you own a small car, it will have the advantage of lower premium costs, while large SUVs and sports cars will be prone to much higher insurance costs.


Getting a car warranty is an absolute must when you are purchasing a car. Although a new car comes with the manufacturer’s warranty, it will not last forever, and you’ll need to have a good warranty for peace of mind because the cost of repairing a car today can make a heavy dent in your pocket.

At the most basic level, a car warranty means that you are covered if things go wrong with your vehicle. However, not all warranties are the same. Different warrantees will cover different damages and they will last a different number of years or number of miles that you drive your car, so you must proceed with caution when you are choosing a car warranty. The worst thing you can do is to get stuck with a warranty that is not good for you or the needs of your vehicle.

The best way to overcome this is to always have a car warranty policy that covers you against any mechanical and electrical repairs that are needed on your car, including parts and labour. No matter how reliable your car is today, there’s no knowing what will happen to your car in future, and these faults can happen when you least expect them.

There’s always a risk of electrical or mechanical failure, and you could be in dire straits especially if you rely on your car to get to work or to ferry the children to and from school. If you don’t have a warranty, keep in mind to have some money saved for unexpected repairs or plan ahead to buy a new car after your warranty period ends. There are just too many factors at stake to risk not having a car warranty, so make sure that you get one no matter what advice you receive.

Monthly Cost of Ownership

If you live in a country where fuel is expensive, you will have to be very careful about the choice of your brand new car. Although cars are more fuel efficient today than they’ve ever been, the variations in fuel efficiency between smaller cars versus larger vehicles can make the difference between spending two digits and spending four digits on fuel per month. Despite the global fall in oil prices, fuel prices are still very high in some countries. This makes it essential to put frugality at the top of your priorities when purchasing a new vehicle.

Effectively, the average monthly car expenses should include fuel, cost of parking, tolls, annual registration, tolls, taxes if any, oil changes and windshield washer fluid. If you live in cities where there is a congestion charge and you’ll be affected by it, you’ll have to factor that into your calculations.

Include a budget of about $150 per year for ‘car things’ such as phone holders, console gadgets, air fresheners or items kept in the trunk. You’ll also have to factor in payment for things like parking tickets, speeding tickets, etc. If you have no car now so can’t guess, use $50 per month as a minimum. If you commute over eleven miles one-way, you’ll regularly take trips over 100 miles or know that parking or tolls will exceed $10 a month will have to add more.


Cars are poor financial investments. Every new car owner must deal with the fact that the value of their car will depreciate at an alarming rate, although this varies across manufacturers and models. This depreciation begins the very minute you turn your key.

Certain models and manufacturers will be more likely to retain a respectable market price, while others will plunge as you drive away from the parking lot. Typically, the drop in value is between 15 – 40% in the first year, or more over three years. According to the experts, choosing a car that holds its value well delivers much bigger savings over time than focusing on fuel efficiency.

Calculating the Monthly Payment

To determine how much you can afford in a car, get out your calculator and follow these steps:

  1. Add up all of your monthly debt payments rent or mortgage, credit card payments, leisure, bills, etc. Let’s say your total debt load is $950.
  2. Multiply the monthly debt load by 12 to figure your annual debt payment. Using the example for the preceding step, $950 x 12 = $11,400 in total annual debt payments.
  3. Multiply your annual gross income (before tax and expenses) from all sources by 0.4. For example, if you earn $40,000 per year in gross income, the annual debt load can run as much as $40000 x 0.4, which is $16,000.
  4. Divide the result of step 3 by 12 to get your monthly maximum debt load. For this example, $16000 / 12 = $1,333.
  5. Subtract your current monthly debt payment from your maximum debt payment: $1,333 – $950 = $383. This result is the maximum monthly payment that you can comfortably handle for your new car.

If you know the final cost of your new car, the interest rate, the amount of your down payment, any rebate, the likely trade-in value of your existing car, any money you still owe on your current car and the number of months of the loan, you can try an online calculator such as the one available at lendingtree.com.

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