When budgeting for a new or used car, don’t forget to estimate total ownership costs. Remember that your monthly expenses will increase not only by the amount of your monthly loan payment, but also by the cost of insuring, fueling and maintaining the vehicle, as well as any local and state property taxes.
Driving, maintaining and insuring a Hummer is going to be much more expensive than a Toyota Prius that gets nearly 50 miles to the gallon.
You may also want to consider how well the vehicle retains value. Some new cars lose value, or depreciate, more quickly in the first year than others. That’s essentially a hidden cost of ownership, because if you have to sell that vehicle before you have paid off the loan, you will not be able to recover that lost value.
Estimating ownership costs on a used car can be dicey. Your best bet there would be to hit check an online forum dedicated to car reviews, talk to friends who own the same vehicle or to your mechanic.
Yahoo’s new car section offers a tool for calculating Total Ownership Costs for new cars at this site
The tool shows, for example, that depreciation and fuel costs dwarf financing and insurance costs in the first year of owning a Hummer H3 SUV base model (MSRP $29,426). The Hummer will cost a total of $21,191 to own in the first year while a a top-of-the-line Toyota Prius (MSRP $23,729) will cost just $8,936. Over five years, the Hummer will cost you $52,096 to own, or nearly $17,000 more than the Prius.
You can really dial in insurance costs by calling an insurance broker and asking for a quote. Don’t forget to ask them for a quote on a gap insurance rider as well.
With this information in hand, you can compare the total ownership cost of your current vehicle to vehicles you are considering buying. Then you can consult your budget to determine which car you can afford.