There’s nothing quite like the freedom of having your own car: the ability to travel, get to work, or simply stop asking your friends to give you a ride. Independence is indeed awesome.
Actually owning a car, however, can be a drag—and way more expensive than you may think. In fact, none other than Shark Tank’s Mr. Wonderful, Kevin O’Leary, recently told CNBC that buying a new car is about the dumbest financial decision you can make. Sure, there’s the five-figure sticker price. But unlike smaller, one-time splurges—a new laptop or killer headphones, for example—owning a set of wheels comes with a virtually never-ending set of additional costs.
You knew there were going to be trips to the gas station and the car wash—that’s fine. But did you also factor in annoyances like annual registration fees, monthly insurance payments and routine maintenance? Unless you got your car and insurance through Fair (where those expenses are bundled into the monthly payment you signed up for), your sweet ride is likely going to come with its share of shock expenses. Here are just a few.
According to both the American Automobile Association (AAA) and the U.S. Department of Labor, the average annual cost of driving a new car you own is $8,886—and that doesn’t even include the amount you’re paying on the principal on your car loan. The AAA says drivers end up paying $700 annually in interest on their loan, $690 on license, registration and title, and approximately $1,200 a year on their own automotive maintenance when it’s not included in their deal.
Valerie Coleman, an automotive expert with Autotrader.com and 5Miles, cautions new car buyers to do some serious budget planning before they sign on the dotted line, as those additional car costs can seriously eat into your lifestyle.
“You have to know what you’re getting into—and don’t buy more than you can afford,” Coleman says.
Coleman suggests spending no more than 15 percent of your pre-tax income on your monthly car payment and to limit your total monthly vehicle expenses to 10 percent of your gross income.
In addition to the expenses above, the cost of car insurance can also be a source of surprise for many drivers—especially younger motorists. A study by Insure.com found that annual policies ranged between $800 and an utterly insane $2,500 a year, with drivers in Michigan, Washington D.C., and Montana paying at the top end of the scale.
And although going with basic coverage seems like a way to save a few bucks, you shouldn’t be tempted to skimp on your insurance plan, warns Joel Ohman, a financial planner and founder of Carinsurancecomparison.com.
“Virtually all third-party auto finance companies will require you to purchase full collision and comprehensive coverage until you have paid off the loan in full,” Ohman says. “In all the excitement of researching which car to buy, it’s something that many new shoppers never even think to consider.”
The hefty price tag you pay for a new vehicle also turns into financial quicksand the minute you sign the paperwork, as depreciation becomes one of the true pains of buying a brand-new car. In fact, your window sticker price suddenly goes “poof” right before your very eyes.
“The moment you drive off the lot with a new car is when the car takes the biggest hit in value, as it’s that very moment that the car goes from being new to used,” says wealth blogger R.J. Weiss. “It’s one of the biggest costs of car ownership.”
In fact, AAA estimates that depreciation accounts for around 40 percent of the annual cost of owning a car. That’s because while your payments stay the same, the average car will lose at least $15,000 of value over its first five years, making many first-time buyers wonder where that money went. Those losses are even more significant if you buy a high-tech electric vehicle that can see its value drop an average of $5,704 per year, according to AAA.
Basically, it’s just like your parents told you: don’t finance a purchase that goes down in value.
So what’s a freedom-loving car person supposed to do? One option is to get a pre-owned car through Fair where expenses like routine maintenance, roadside assistance, a limited warranty, registration, title, taxes and even optional insurance are all included in the monthly payment you agree to upfront—and are covered for as long as you keep the car. It’s basically like bundling for your vehicle.
With Fair, there are no hidden costs so you know what it is actually going to cost to drive the car you want. And if your situation changes and you decide you don’t want to drive the car any more, you simply turn it in and walk away.
Otherwise you'll likely have to put yourself on the financial hook for years for a piece of metal that will slowly become obsolete and lose almost all its value as you own it, while costing you thousands in surprise expenses along the way.
Perhaps Shark Tank's O'Leary said it best: "You're thinking about buying a car. Let me give you a new idea: Don't."