Figuring out How Much Car You Can Afford (and the Cost of Overestimating)

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Easy transportation continues to be a necessity for most of us. About 9% of U.S. households have no vehicle at all, although some adults choose to forgo a car and use public transportation. But if you’re in the market to purchase a car, you’ll need to figure out how much you can afford.
Car ownership has never been cheap. Alongside the costs of purchasing a vehicle (whether new or used), car owners have to take into account loan payments, insurance, registration fees, maintenance costs and more. Before making your purchase, check out how car ownership will put demands on your wallet, so you can better understand just how much car you can afford.

Cost of Ownership Starts When You First Buy Your Car

As of January 2018, the average cost of a new car was just over $36,000. That includes the price of the vehicle as well as other associated payments made to the dealership, state and county, such as the following.

  • financing charges if you take out a loan
  • vehicle registration fees
  • sales tax
  • documentation fees
  • insurance
  • additional fees from the dealership or advertising fees from the car manufacturer

Buying a used car will save you some money, of course—the average cost is around $19,400. You can also buy a new, lower-end model, such as a midsize vehicle or compact car. However, if you’re buying from a dealership, you will still have to pay several transaction fees. And in a private deal, you’ll still pay for the vehicle registration, insurance and taxes.
There’s also no consistency across states for what you’ll pay, and sometimes fees and payment amounts will vary within states. For example, in Virginia, you’ll pay taxes on your vehicle purchase at the point of sale (4.15% statewide)—plus property taxes on the vehicle for as long as you own it. Each county in Virginia assesses its own property tax rate as well, so what you pay in one part of the state likely won’t be what you would pay elsewhere.
In neighboring Maryland, you’ll pay a 6% excise tax on the purchase of any vehicle, whether new or used. You also have to pay this tax for your registered vehicles if you move to the state. However, that tax is only assessed once, unlike Virginia.
In most states, you will have to regularly renew your vehicle’s registration. And in all states except for New Hampshire, you are required to carry car insurance, which can be expensive depending on where in the state you live. Nationwide, the average cost of insurance is around $900, but some states are uniquely expensive, such as Tennessee, where the average cost of insurance is $1,200.
Overall, you should budget the following for your car each month.

  • Insurance: $75
  • Gas: $130
  • Maintenance: $100
  • Loan: $500 (new vehicle) or $375 (used vehicle)

What you pay will vary, however, from state to state. Average insurance rates, gas prices and maintenance costs are different across the country. How much you pay per month in car loans will also be impacted by your credit score, your down payment and the length of the car loan.

How to Change Cost of Car Ownership

There are unfortunately only a few things you can do to positively influence the cost of car ownership. However, there are a few ways to shift ownership costs in a more favorable direction.
Purchase a cheaper vehicle. If the monthly costs of a potential vehicle are daunting for you, look into buying a cheaper vehicle. This could mean a less expensive and smaller car, or it could mean buying a used vehicle. If buying used, then research the vehicle’s history. Some dealerships will offer vehicle history for free, but you may need to pay to get the vehicle’s maintenance and accident records.
Extend your loan term period. If you decide to extend the length of your car’s loan payment term, you’ll pay less overall each month. Loan payment terms have been increasing annually in the U.S., with the average term now at 69 months. However, it’s important to remember that extending your payment term also means increasing the amount of interest you’re paying in the long run.
Improve your credit before purchasing a vehicle. Having a good credit score will make a large impact on the interest rate you’re offered. If you can hold off buying the car for several months while you improve your credit score, then you may be able to get a better interest rate and save money on the loan.
Refinance your car loan after improving your credit score. If you already own a vehicle but purchased it when your credit score was much lower, you may be able to refinance the loan if your score has improved. Doing so will likely lower your monthly car payment. However, the refinance may extend the loan term, so consider the extra interest you’ll pay.

Missing a Payment Will Negatively Affect Your Car Ownership Costs

It’s important to remember one thing: Never miss a car or insurance payment. Missing a car payment can result in steep penalties on your loan, while missing insurance payments could result in having your insurance canceled altogether. In most states, you may face huge fines for driving while uninsured, and your driver’s license may be revoked. You may even have to get costly high-risk insurance, known as SR-22 insurance.
Fines for driving uninsured can vary, but they’re almost always costly. In Tennessee, you’ll pay a $300 fine for driving uninsured. Meanwhile, other states, such as New York, assess a daily fee for driving while uninsured, an amount that can result in over $1,000 in penalties for the uninsured driver.
Buying a car should never put your finances in jeopardy. If you are struggling to pay your bills on time, it may be time to get help from a certified nonprofit credit counselor. They can help you figure out how to make your budget work so you can afford the car you want.
About the Author:
Robert Harrow reports on the credit card industry, focusing on how changes to regulations and card offerings will impact issuers and consumers alike. Prior to working at ValuePenguin, Robert researched cancer imaging and treatment laser systems at CUNY Hunter College. He graduated with a major in Physics and minor in Mathematics from Hunter.

Views expressed are the personal views of the author, and do not necessarily represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.