6 Hidden Costs When Buying a New or Used Car

When you think about big financial purchases, one thing that typically comes to mind is buying a car. Whether you’re buying a car new or used, there may be associated costs you haven’t considered.

These additional costs can be considered hidden costs of buying a car. Whether the car is new or used, it’s important to understand the hidden costs as you shop and compare deals. Some of these hidden costs may be faced upfront, while others will be incurred along the journey of car ownership. 

Let’s look at 6 hidden costs you might face when buying a new or used car.

Upfront Hidden Costs

First, we’ll look at three hidden costs you might face when you make your purchase. Understanding these costs will help you be better prepared to buy your new or used car.

Hidden Cost #1: Finance Charges

While you might not face all the finance charges right when you purchase a car, it’s good to understand them and how they might affect your overall cost of owning a car. 

Finance charges are charges you face as a result of a car loan. 

These charges include things like interest on the loan (which you’ll pay as part of your monthly payments), loan origination fees, and any other upfront or long-term fees you’ll pay over the life of the loan. 

Understanding the finance charges associated with borrowing money to finance your car will help you understand your loan and ensure you can afford the fees.

Hidden Cost #2: Dealer Fees

Dealer fees are fees added to the car’s purchase price by the car dealership. 

According to Lending Tree, typical dealer fees equal 8-10% of the car price. Some dealer fees are non-negotiable and affect the sale of every car. Others are dealer specific, and you might be able to eliminate them to lower the cost.

Here are three non-negotiable dealer fees: 

  1. For both new and used car purchases, a dealer fee all buyers typically face is document fees. These are fees for preparing the documents associated with the car sale. 
  2. You may also need to pay inspection and emission fees. These are required in some states and cover safety and emission tests to ensure the car is safe and environmentally sound. If you’re buying a car in a state that requires these tests, these are fees you can’t avoid. 
  3. The final dealer fee you can’t avoid applies to new car purchases. The dealership will likely charge you a destination fee if you’re buying a new car. This is the fee associated with getting the car to the dealership.

Some fees the dealership wants to charge as part of the purchase can be negotiated or eliminated to help lower the cost of the overall purchase. Things like dealer-installed accessories and extended warranties are optional, and you don’t have to purchase them if you don’t want to or if they don’t fill needs you have. 

Another fee you can potentially avoid is GAP insurance. GAP insurance covers the difference or gap between what you owe on the car and the car’s value. If you’re making a down payment, GAP insurance is likely a fee you can eliminate. If you’re purchasing a car without a down payment but have an emergency fund set aside, you also may not need GAP insurance.

Hidden Cost #3: Different Types of Taxes

Other hidden costs of buying a new or used car are the different types of taxes that might be assessed. Two main taxes you may face are sales tax and excise tax.

Depending on the state you live in, you might have to pay sales tax when you purchase a car. Where you purchase the car doesn’t impact the sales tax you pay. Instead, you’ll pay sales tax based on the state you live in. It’s important to understand the sales tax situation in your home state and factor it into the cost of buying the car.

Another tax that’s often assessed is excise tax. You’ll pay this tax based on the vehicle you purchase and the state you live in. 

Some states charge you excise tax only once, typically when you purchase the car. Others charge it each year when you register your car.

Understanding how excise tax works in your state can help you be better prepared to cover the expense.

Long-Term Hidden Costs

Now that you understand some of the upfront hidden costs you may face when buying a car, let’s look at some long-term costs you might face. Understanding these costs and building them into your budget can help you stay on track and avoid going into debt for your car.

Hidden Cost #4: Title and Registration

When you buy a car, whether it is new or used, you’ll need to have the car title issued with your name and information on it. Typically, you only pay to title a car once. But if you need to make changes to the title or need a new copy of the title, you’ll likely need to pay for this service as well.

Car registration is typically paid each year. This keeps your car’s registration current. Registration fees vary by state. And you’ll pay your car registration to your state. Factoring your car registration not only into the vehicle’s purchase price but also into your annual budget is important.

Hidden Cost #5: Insurance

Insurance costs may not be so hidden, but you need to consider them when buying a new or used car. Car insurance is important and is mandatory in almost every state. 

States will typically specify a minimum amount of insurance coverage you must carry. You can also get additional insurance to cover your car if you’re in an accident with an uninsured vehicle. 

Having adequate insurance coverage is also typically required by a lender if you have a loan on the car. They’ll often require both comprehensive and collision coverage.

Hidden Cost #6: Routine Maintenance and Upkeep

If you’ve never owned a car before, you might not think about the costs of maintaining your car in the long term. But factoring routine maintenance and upkeep into your budget over time can help you be prepared for all the expected and unexpected expenses that come with car ownership. 

To prepare for these costs and be ready when they come up, AAA recommends saving $50 a month ($600 a year). Adding this to your budget and saving plan can help you be prepared in an emergency.

When we think about a big purchase, like buying a new or used car, we often think about how much of a down payment we can afford and how the monthly payment might affect our budget. While these are two good costs to consider, it’s important also to consider the less obvious or hidden costs of purchasing a car. Keeping these fees in mind and setting aside funds to help cover them before you make your car purchase will help keep your budget intact.

If you’re thinking about purchasing a car, starting a sinking fund for car expenses might be helpful. 

A sinking fund is a savings account set aside for a specific purpose. Consider the annual cost of things like car insurance (if you pay annually or semi-annually), car maintenance and repair, registration, and any other expenses you foresee having. Divide these expenses by 12 to get a monthly cost. Then save that amount each month into your car sinking fund so you’re ready when the bill or expenses pops up. 

Being proactive about the expenses you know you’ll face as a car owner will help keep you on track.

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