Hidden Used-Car Costs New Grads Must Know

A car has hidden costs

In many students’ minds, “car” and “graduation” go together. For some, it’s because a post-grad job requires a vehicle to commute to and from work. Others may simply want a car to maintain their independent lifestyle from college (especially if they plan to move home).

This isn’t changing for the class of 2016, either. According to a recent survey conducted by CarGurus, almost one-third of upcoming graduates plan to buy a car. And of them, 57% plan to pay for it entirely on their own.

Buying a car is a major purchase—even if you opt for a moderately priced used one. Taking this on yourself is a big sign of financial freedom, but it’s also a big financial responsibility. To handle it wisely, keep in mind the following hidden costs.

Finance Charges
According to the CarGurus survey, 46% of those getting a car will spend as much as $15,000. That’s a lot for someone just starting out. Ideally, you can put down at least 20 percent of the total cost in cash. But even then, you’ll still have a large amount left to finance.

If you take out a car loan, keep in mind how much you’ll pay overall due to interest. Your interest rate will vary due to a number of factors. The New York Times reports the average rate on a 36-month loan for a used car is 3.62%–but the key word there is “average.” Since you’re just leaving college and may not have much credit history, your rate will likely be higher. If you’ll leave college with a bad credit history, we have advice for car shoppers with poor credit.

Your best bet may be to shop around for rates before you shop for cars. Check with your local bank or credit union to see what you qualify for before financing the car through the dealership. This will help you keep these costs as under control as possible over the long run.

Cost to Borrow $15,000 by Interest Rate
Rate Interest accrued over 3 years Total cost
3.62 $852 $15,852
4.62 $1,092 $16,092
5.62 $1,335 $16,335
6.62 $1,580 $16,580
7.62 $1,827 $16,827

Taxes and Fees
When determining how much you can spend, you should also keep in mind how different taxes and fees will affect that amount. When it comes to used cars, dealers can hit you with a lot of fees—and for some surprising things.

Dealers can charge you for some straightforward expenses, like a documentation fee for your sales contract. However, other fees stick you with the costs for advertising your vehicle, extended warranties, and credit insurance (which is something your regular insurance may cover anyway).

Like with the rest of the car-buying process, these fees may be negotiable. Look through your contract—you are paying for it, after all!—and question any fees you don’t recognize or understand. You may be young, but that doesn’t mean you were born yesterday.

You will have to pay registration and transfer fees for your car, as well as the used-car sales tax. These taxes vary by state, so check out this Tax and Tags calculator from the DMV to get an idea of how much you may be on the hook for.

Insurance and Maintenance
Generally, it’s smart to spend no more than 20 percent of your monthly take-home salary on your car. However, don’t just plug that car payment into your budget and call it a day. That’s only part of the story.

You have to account for the car’s associated costs as well, like gas, maintenance, and parking. Insurance may also cost much more than you anticipate. In the CarGurus survey, 53% of respondents thought auto insurance cost $500 or less per year. The actual amount may be four times as much.

If you’re buying a used car, you may want to put aside extra money for maintenance as well. Even if you invest in a vehicle history report, repairs will come up that you’ll need to handle—like new tires or brakes. OpenBay is a great resource for tips and advice on part replacement help and car maintenance schedules.

-Ryan Lane

Find Certified Pre-Owned Cars and Used Cars in your area at CarGurus.

Shopping for a new or new-to-you vehicle this weekend?
Bring along CarGurus’ mobile app to help check prices, find good deals, and research cars on your smartphone.

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