Auto Ownership

With over 90% of American household having at least one vehicle, odds are high that you will need to prepare for the financial responsibilities of auto ownership at some point in your life. Before obtaining a vehicle of your own, it’s important to assess your needs and determine what you are looking for in a car:

• Price Range- How much car you can actually afford will likely be the main consideration as you begin researching your ideal vehicle. Regardless of how you choose to obtain your car- purchasing, financing, or leasing- be sure to think about what upfront costs are due, such as down payments and fees, along with the monthly affordability of your vehicle expenses, especially if you will have a loan or leasing payment. Don’t forget to think about the added expense within the larger context of your monthly budget!
• Year & Mileage- While cars that are older and/or have more miles on them tend to be cheaper, the money you save upfront is likely going to be repurposed in repair costs- the older the car and the more wear and tear a vehicle has endured, the more maintenance it will require
• Size- How large your mode of transportation needs to be can serve as a significant deciding factor in the type of vehicle you buy- are you primarily driving yourself and one or two other people? Do you have a large pet that will need a large backseat? Are you car-shopping with your family or household in mind and will need to accommodate more passengers?
• Fuel Efficiency- Another cost related consideration, a vehicle that is fuel efficient, hybrid, or electric may help you save on gas from month to month
• Safety- While new-aged safety features like back-up cameras and blind spot alerts are becoming more standardized, additional protective measures may increase the cost of your vehicle, but could mean more peace of mind for you when on the road
• Terrain/Climate Needs- Similar to needs around safety, certain climates and types of terrain may impact your needs in a vehicle- if you live somewhere that receives significant snow in the winter time, you may look for a car that is equipped with four-wheel drive to improve traction on wet or icy roads
• Insurance Rates- Certain vehicle make and models that have not scored as high on crash test scores will likely impact the auto insurance rate you receive
• Discounts- Whether you’re taking advantage of a holiday deal or using a discount plan for family members, certain dealerships or car companies may offer enticing savings that sway your decision to one vehicle over another
• Special features- With so much new technology in the last decade, the extra features that are available in cars nowadays could impact what you look for in vehicle- massaging seats, heated seats, hands-free driving, enhanced displays, integrated technology with outside systems like Alexa and Apple… the list is endless, so think critically how much you actually need these special features as it is more likely than not that they will increase the price of the vehicle itself!
• Other Factors- Additional considerations that may drive your vehicle needs include:
  • Ease of access for service or other customer support needs
    • Certain foreign or luxury cars could have limited locations for servicing
  • Cost for repairs and parts
    • Specialty cars are likely to require unique parts, which in turn means an increase in cost
  • Manufacturing location
    • Certain individuals may narrow the scope of their vehicle needs based on where the car was manufactured or if the auto company is based domestically or internationally   

Once you’ve identified the most important features you are looking for in a vehicle, you’ll then need to determine the best option for actually acquiring your car-

Are you planning to outright purchase the vehicle?

If you know you want to buy but don’t have the full lump sum to purchase, is an auto loan right for you?

Or are you looking for short-term ownership and would prefer to lease a vehicle?

There are pros and cons to each ownership type, and reviewing the different options can help you determine which is right for you:

Purchasing

Arguably the most straightforward way to buy a car is to purchase it outright with your own money. While a complete cash buy can be a significant financial obligation, there are cost effective aspects to a purchase. Namely, purchasing a vehicle allows you to avoid costs associated with financing or taking out a loan to buy a car like interest, additional insurance coverage, and fees. Owning your car right away also means the vehicle is instantly considered a personal asset with monetary value- although cars are notorious for depreciating in value over time, you still are adding to your overall net worth and could even turn around and sell the car if you needed cash or were trying to flip it for a profit.  

When purchasing a car, you’ll need to know your budget. Keep in mind that the price you are quoted in person or online may be different than your actual "out the door" cost. These additional expenses- like documentation fees or elective packages- are known as closing costs. As you shop around, be sure to ask about these types of expenses to confirm if the vehicle you are looking at actually fits in your price range. You can learn more about closing costs in the section below, Ownership Costs & Maintenance Expenses. 

Typical budgetary constraints mean it's common for folks to purchase a used car, but it can also impact the size, make, and model you end up with as well. Buying a used car may help to meet your bottom line, however you do put yourself at risk for getting a vehicle that has been marked up, operating issues, previous damage, or needs serious maintenance. When buying a used car, use sites like Kelley Blue Book to identify the price range and value of the vehicles you are considering, as well as Carfax to look up reports of the cars’ accidents and damage reports.

If you aren’t sure where you should purchase your vehicle from, you may want to start with local auto dealerships as many have used vehicles on site. You can also look online at platforms like Carmax, Autotrader, and Carvana. While you may be able to find vehicles through sites like Craigslist or Facebook Marketplace, there tends to be more risks associated with vehicle sales between individuals opposed to purchasing your car through a dealership or established company.

Regardless of who you purchase from, be sure that there is proper documentation of the purchase. For example, you may want to use a cashier’s check from a bank or credit union for added security. You will also want to ensure that the vehicle’s title has been transferred over to you. Furthermore, you’ll want to keep any receipts or bill of sale as proof of the purchase. Finally, you’ll need to review the process of registering your car and obtaining tags and a license plate in your respective state. Visit your DMV website to learn about your next steps after the purchase of your car is finalized.

Financing

If you’ve determined that owning your own vehicle is the right option for you, but lack the funds to purchase your car, financing or taking out an auto loan for your car might be worth considering.

Similar to a student loan, a car loan involves receiving a fixed, lump sum amount of money to be applied towards the expense of purchasing. In turn for receiving the funds, you agree to pay back the money within a specific amount of time plus additional payments of interest (the cost of borrowing the initial, principal loan amount). Auto loans can be generated through banks or credit unions as well as directly through certain auto dealerships.

Auto loans are based on several factors, including your credit, income, down payment, and dollar amount of the loan itself. The length of the loan repayment as well as the interest rate will also impact the overall terms of your financing. Common terms range from 48-72 months while current interest rates tend to fall between 4%-9%, based on both your credit history as well as if the car is new or used. Auto loans are repaid on what's called an amortized schedule: your monthly repayment is on a fixed schedule based on the principal loan amount divided by the months in the loan term plus the estimated interest, assuming your rate is fixed, that would accrue over the length of the financing.

Down payments or vehicle trade-ins can be applied towards financing, and can lower the amount you need to borrow as well as improve the terms of your loan. A down payment or trade-in can be especially helpful when looking to purchase a new car- if possible, aim for an amount that is 10%-20% of the cost of the vehicle you are looking to buy.

Keep in mind that while you are in repayment of the auto loan, your lender or financer may require that they are listed on the title of the vehicle until you complete the terms of the loan. Similarly, you may need to meet certain insurance coverage requirements and pay additional fees during the financing term. Check with your lender or financer for all required costs and required action steps before finalizing and agreeing to the loan terms. 

During the final stages of closing on the terms of the vehicle, you may be asked about adding on elective packages or features before closing on the final cost of the vehicle, like extending the manufacturer's warranty. If you were approved for a specific loan amount and the elective purchases you opt for increases the cost of the vehicle, you'll need to be able to pay for the difference in price on your own. Moreover, there may be other closing costs that continue to increase the price of your car. For more information on the types of closing costs to prepare for, check out the section on Ownership Costs & Maintenance Expenses. 

After you have completed the terms of your auto financing, you own the vehicle outright. 

Leasing

Leasing a car is similar to renting an apartment- your ownership is temporary as you are essentially borrowing the car for a set amount of time. Instead of paying the full cost or setting up loans, leasing entails paying a monthly amount to use the vehicle. Once the lease is over, you return the car. If you do not enter into another lease or opt for a purchasing or financing route, you are without a vehicle.

Leases are almost always offered on new cars, and the terms of the lease are based on several factors:

• Credit history
• Estimated depreciation of car’s value during your lease
• Length of the lease;  12, 24, & 36 months are the most common
• Mileage use; 10,000, 12,000, or 15,000 miles are typically your options
• Interest accrual and fees

While a vehicle under lease may be covered to receive routine care, in addition to the manufacturer’s warranty, excessive damage may not be covered. Furthermore, if the vehicle has any interior or exterior damages- like stained seats or dented door- you may be charged even more fees when you go to return the vehicle. Even terminating your lease agreement early could come with a financial penalty.

If you have determined that a lease is right for you, be sure to read the lease agreement-the contract between you and your lessor- very carefully so you know what is covered and have an excellent understanding of your rights and responsibilities during your lease.

Comparing Your Options

As you decide between purchasing, financing, or leasing a vehicle, remember that each option has its pros and cons:

• Purchasing: 
  • Eliminate the need for a loan, fees, or extra costs that typically come with financing and leasing
  • Maintenance and other upkeep costs will generally fall solely to you as the owner- you'll need to save for some kind of repair bill eventually! 
  • Will most likely need to drive the vehicle for a while to get most value on the purchase
  • Vehicle becomes an asset and could positively impact your net worth 
• Financing: 
  • Enables you to purchase a vehicle without having all of the lump sum cost upfront 
  • You will pay more over time compared to a purchase due to interest and loan fees 
  • With responsible management, financing can positively impact your credit history 
  • May be able to extend the manufacturer's warranty during financing term, but eventually all maintenance costs will be your responsibility 
• Leasing: 
  • Allows you to drive the newest and most up to date vehicles on a consistent basis 
  • Never build equity or gain ownership of the vehicle- you'll always have a car payment!
  • Depending on the terms of the lease, may not be responsible for maintenance or repair costs 
  • It is likely that you'll pay some kind of fee during the agreement- wear & tear charges, mileage overage, etc. 

In addition to the costs associated with purchasing or obtaining your vehicle, there are weekly, monthly, and annual expenses that you’ll need to plan for to ensure you are financially prepared for everything that goes into owning a car.

To help you better reflect on the overall costs of ownership and estimates for vehicle upkeep, consider the following:

Closing Costs- Finalizing the purchase or financing of a car, especially when doing so through a dealership, can mean several hundred or even thousands of dollars extra compared to the sticker price you thought you were paying. Closing costs can include documentation fees, destination charge, appearance packages, and extended warranties.

State Specific Costs- A new car must be properly titled and registered in the state you live in- this process alone can incur additional costs. Some states may charge annual taxes or fees to registered driver’s for simply owning a car and using the roads; similarly, some states have tolls along major roads that make it almost a necessity to purchase an annual toll pass. Furthermore, some states may have fees associated with registering a car for the first time- check out your state’s respective DMV website to get a sense of upfront and annual expenses.

Insurance- Virtually every state, with the only exception being New Hampshire, requires drivers to obtain auto insurance. However, what your auto insurance needs to cover and its underlying cost will vary by state. For example, the average monthly cost of car insurance in Michigan is $196, while the average cost in South Dakota is only $28. Insurance can also be impacted by location- insuring a car in an urban area will typically cost more as opposed to a car located in a rural area.

Keep in mind that many insurance companies will offer discounts if you buy your coverage on an annual or semi-annual basis. If there isn’t a true monthly payment, be sure to save or put away the monthly equivalent to make the 6-month or 12-month lump sum payment.

Gas- A more routine expense, how much it will cost to put gas in your tank is perhaps the most noticeable financial obligation of car ownership. Reason being, we tend to fill up on gas multiple times a month. Gas prices vary based on region- some states regularly surpass $4 while others typically fall below $3. California alone reported average gas prices as high as $6.46 during record inflation rates throughout 2021 & 2022.

The type of vehicle itself will also impact how much you pay at the pump. For example, using the AAA Gas Cost Calculator (December, 2022) the cost to drive from Raleigh to Charlotte is:

• Fuel efficient sedan that gets 40 miles to the gallon- $12.11
• Average midsize car that gets 30 miles to the gallon- $16.15
• Non-fuel efficient truck that gets 20 miles to the gallon- $24.22

The more you need to drive or the further your commute is, the more noticeable the differences in gas prices will be.

Oil Change- An oil change, which you typically need to get done every 3-6 months, generally costs around $50 for conventional oil and $90 for synthetic. This means you could be looking at around $175 dollars in costs for oil changes.

Tire Replacement- While the average vehicle owner doesn’t have to plan for tire replacement too often, once it’s time to get new tires, the cost can be quite steep. Although the cost of a tire varies significantly on size and quality, the average driver should anticipate to spend anywhere from $600-$1200 for a new set of tires.

Repairs- Much like any other object you own, it is only a matter of time before general wear and tear or an unexpected accident takes its toll on your vehicle and a repair cost is needed. Preparing for an auto repair is dependent on the following:

• Is the repair considered major or minor?
• If a part is needed, how expensive is the part?
• What is the rate of labor?
• How much time or expertise does the labor require?

An average minor repair, like replacing a radiator hose or air conditioner compressor, probably costs around $200-$400. A major repair, such as replacing the exhaust system, is likely to cost closer to $6,000.

How Much Should I Save for Auto Maintenance?

There are numerous factors that impact how much someone might want to save for eventual maintenance and auto repairs.

For newer vehicle owners, aiming to have $1,000 in a rainy day fund may be an appropriate goal to work towards.

For those with older vehicles, where repairs could be more likely, more significant, and technology on the vehicle more outdated, you may feel more confident in having $2,000 or more earmarked for future bills.

If you need more guidance on how much to save, keep track of any repair costs or trends in the frequency of how often you get car maintenance bills. The older your vehicle is or the more often you drive your car, the higher your future repair bill is likely to be.

You can also ask your local auto repair shop to assess your vehicle and notify you of any repairs that may be expected in the near future.