When you buy a car, the purchase price is only one aspect in the total cost of your vehicle purchase. Associated costs can be substantial, and while closing costs are not what they would be if you were acquiring a piece of real estate, the costs you incur when financing a vehicle should be factored into any plan whether you buy or lease a car.
What are some of the costs associated with financing a vehicle? Regional sales tax, registration, warranties and other fees may be added onto your auto loan and become part of the financed cost of the vehicle. These would be called “up front” costs, even though you are paying for them over time. The other cost to keep in mind is the amount that is being compounded in interest over the life of your loan. The interest rate on your loan can make a big difference in your vehicle financing costs over time.
For example, let’s say you buy a car and the amount financed on the vehicle is $15,000. If you borrow at an interest rate of 5% over a five year period, that compounds roughly $750 in interest every year, and can add up to $3750 to the amount that you finally pay over time before the car is paid off. Hike that interest rate up to 10%, and you have more than doubled that cost. You could be paying up to $7500 more in the next five years!
By buying a car with cash up front, you wouldn’t have to pay any vehicle financing costs, because you would not be financing the vehicle. But even then, if you take the money out of a savings or CD account to pay for the car, that can count as what is commonly referred to as an “opportunity cost.” Meaning that, instead of earning interest for you in an account and accruing value, that money is in a car that is depreciating in value over time.
Whatever you decide to do, be sure to factor in the vehicle-financing costs when you are budgeting to purchase a vehicle. Otherwise, when it comes to sign for your auto lease, you might be learning the meaning of the word “sticker shock!”