Understanding “Dream Vehicle” Cost
Helps Keep You in the Driver’s Seat

Understanding the true cost of your dream vehicle may be the best way to stay in the driver’s seat as you search for a purchase that reconciles your desires with your pocketbook.

Keep in mind, the sticker price of a new vehicle is just one element of its total cost. Its overall impact on your long-term budget will depend on loan terms, operating expenses, insurance, rebates, and even supply and demand. These factors can increase the cost of the car even as they decrease its value, sometimes before it leaves the dealer’s lot.

The monthly payment for a 60-month vehicle loan on a fully financed $40,000 purchase at an interest rate of 4.5% will be $746, although experts say higher interest rates quickly can push payments up. For example, a 7% interest rate results in monthly payments of $793. That’s a difference of $2,820 over the life of the loan.

Generally, experts advise buyers to avoid spending more than 15% to 18% of their monthly income on total vehicle costs. The sticker price is just the beginning of these costs. Kauffeld says the sticker price typically excludes some costs such as extended warranties, dealer handling fees, “protection packages” of sometimes dubious value for services such as “invisi-shield,” title fees, and state sales taxes, where applicable.

The cost of insurance is likely to rise with the cost of the vehicle, especially if the model is deemed more likely to be stolen or involved in an accident. Ask your insurance agent for a quote. Gasoline costs are another ongoing expense, especially on larger models with high gas consumption. Opting for a global positioning system (GPS) to obtain directions or roadside assistance can create an additional monthly charge once the free trial period ends.

Many owners also are unprepared for the higher costs of routine service and repairs for luxury cars, which sometimes can cost twice as much to service when compared with more mundane vehicles.

Longer terms

Some buyers attempt to manage the cost of high-end vehicles by extending the term of the loan. Sixty months was once the longest term offered on standard vehicle loans, but many lenders now offer extended terms. At Air Force Federal Credit Union, the longest term available is 84 months. Lenders, including the credit union, typically charge an additional 1% interest for each year added to the term beyond 60 months.

Extending the term costs the borrower. As an example, on a $30,000 loan, a 60-month option with an interest rate of 3.99% would mean monthly payments of $553 and a total finance charge of approximately $3,146 over the life of the loan. Extending the term to 72 months reduces monthly payments to $483, but increases the interest rate to 4.99 % and results in a total finance charge of $4,781.

Increasing the length of the loan also may contribute to being “upside down” in an automobile loan. “Upside down” buyers owe more to the lender than the vehicle is worth. This can occur because the buyer has little or no down payment, the term of the loan is so long that the vehicle depreciates faster than the buyer accrues value through payments on the principal, the manufacturer offers rebates that reduce the vehicle’s resale value, or because the popularity of a new vehicle model creates an oversupply in the used market.

Buyers whose car is damaged in an accident or taken by thieves may discover that the amount they owe on the loan is thousands more than their insurance coverage, which typically is based on the vehicle’s current market value. Air Force Federal Credit Union sells guaranteed automobile protection (GAP) insurance to cover the difference between the amount paid by insurance and the amount you owe on your loan.

Whatever route you take, experts agree that doing your homework will pay off. For example, understanding the trade-in value of your used car helps you negotiate a fair price with the dealer.

Meeting with one of loan officers before you visit the dealer will help you decide how much car you can afford, help you obtain a competitive interest rate, and prequalify for a loan.