Car Handbook

What Can I Afford?

While newspaper ads and sticker prices in car windows may give you a rough idea of what a car costs, they don’t tell you the total cost of owning a car. Car costs vary based on the options, the terms of the loan, the mileage (if it’s used or leased), the insurance, driving habits, and current market values. You can figure your own costs of owning your car by filling out chart.

Figuring It Out

So how do you figure out how much owning a car will cost you? The answer can be found with research and a little guesswork. Fixed costs will be the same regardless of whether you drive just twice a week to pick up groceries or drive an hour to and from work every day. Flexible costs increase with the mileage and wear and tear on your car.

Fixed Fees

Down Payment

If you take out a loan for a car, you’ll pay a percentage of the car’s cost up front as a down payment. Finance companies usually require a down payment because they like to see you put up some of your own money to demonstrate your commitment to the transaction. A trade-in can also be used as a down payment.

Rebates, sometimes offered to consumers by car manufacturers, can help you make the down payment if you don’t have the cash. Rebates are usually well advertised.

Your Loan Payment

Banks and credit unions frequently offer the lowest rates on loans, but car manufacturers and finance companies offer loans, too. Car dealers may also offer to provide financing. Sometimes you’ll pay car dealers extra interest for this one-stop shopping convenience. Other times dealers may knock down interest rates to pass along savings they’ve received from manufacturers who are trying to push certain makes and models.

You should be able to negotiate the interest rate you get from a dealer. For instance, a dealership may be able to get a loan for you at six percent, but will charge you eight percent and keep the extra two percent for itself. You should ask the dealership for the exact rate the bank is willing to make the loan at and compare it to what the dealership wants to charge you. If the rates are significantly different, negotiate the difference.

If you get a loan to finance your car, the seller must provide a written statement disclosing what the payments would be if certain add-ons are included in the purchase price (and the loan) and what the payments would be without those add-ons.

The add-ons that must be disclosed are:

1. Service contract.
2. Insurance.
3. A debt cancellation agreement.
4. Theft deterrent device including: vehicle alarm system, window etching, body part marking system, steering lock, pedal or ignition lock, fuel or ignition kill switch.
5. Surface protection such as undercoating, rust proofing, paint sealant, or fabric protector.

The disclosures must be in a single document in ten point type, separate from the sales and loan agreement, and must be signed by the purchaser.

Tip: If you have your loan payments automatically deducted from your bank or checking account, you may be able to get a discounted interest rate. The automatic deduction cuts down on the lender’s administration costs, so your lender may be willing to give you a break.

Questions to Ask About Your Loan

1. What’s the percentage rate I’m paying? Always look at the annual percentage rate. It may differ from the face rate of the note if you are buying and financing extras.
2. What’s the grace period for my monthly payment?
3. Is there a late charge after 10 days? 30 days? If so, how much is it?

How Do You Get a Loan?

Getting a loan is easy if you’ve taken care of your bank or checking account. You don’t need a long credit history. Financial institutions will look at the following items when considering whether or not to grant a loan:

• A pattern of meeting financial obligations;
• More than one year at the same job; and
• No more than half of your gross income committed for fixed expenses such as rent, loans, and credit cards.

Having all of these is not always necessary, according to bankers.

Credit Problems?

If you don’t meet the above profile, you still may be able to get a loan. If you have a lot of cash on hand and have found a good deal on a car, you may be able to get a loan for the balance. But if you don’t have much cash and you have a bad habit of bouncing checks or missing other bill payments, you’ll need to discuss with your lender how to clear your record.

Establishing good credit can be as easy as paying your bills on time for six months. Lenders typically want to help you get a loan. Establish a relationship with a loan officer, and tap into his or her expertise.
Be wary of finance companies that offer loans to high-risk individuals who are considered “unbankable.” You’ll pay much higher than average interest rates at these institutions.

The law requires that you be informed if your credit report is obtained in connection with your loan application for a motor vehicle loan. If a credit report is obtained, you must be given a written statement telling you that a credit report was obtained and that provides you with information on how to contact the various credit reporting agencies. If you make a request in writing, the dealer shall obtain from the lender the information regarding which credit reporting agencies have been contacted. Once you have that information, you may contact the credit bureau to determine what information is in your credit report. For more information on credit reports, please refer to the Credit Handbook provided by the Minnesota Attorney General’s Office.

Length of Loan

Several years ago, loans were usually three years in length. Now, however, loans are typically five years or longer in length to spread out the higher cost of a vehicle over a longer period of time.

If you plan to buy a new car before you pay off your current car loan, you’ll end up paying two car loans at once. To keep from incurring high debt, plan to keep a car until you’ve paid off the loan.

Used Car Loans

Loans for used cars are similar to loans for new cars, except that lenders generally finance no more than 80 percent of a used car’s value. This total value is usually based on the “National Automobile Dealers Association’s (“NADA”) Used Car Guide” or “blue book.” NADA’s blue book can be found at the library, most bookstores, and online at www.nadaguides.com. Typically you’ll pay a higher interest rate on a loan for a used car than for a new one.

A Loan Turns You Upside Down

When you finance a new car or truck, you’ll most likely be “upside down” for much of your typical five-year loan. That means a few years down the line you will probably owe more for the car than the car is worth. This is due to depreciation.

Knowing that you won’t really own your new car until it’s very used is an uncomfortable realization for some people. It’s also one reason to consider buying a used car. Leasing is another option for those who don’t care if they ever own a car and would rather drive a newer car all the time.

Once you determine the interest rate you’ll pay for a loan, log the monthly loan payment and the total annual payment into the preceding chart. If you plan to finance options or extras such as extended warranties and credit life insurance, add these to the loan payment.

Repossession

When you take out a loan, the lender owns the car, not you. You risk having your car “repossessed”—taken back by the finance company—if you lose your job, are hurt in an accident, or otherwise can’t make your loan payments. In that case, you won’t recoup a penny of the payments you’ve already made. In addition, you may have to pay a “deficiency judgment”—the difference between what the finance company sells your car for and the loan amount. Because the finance company is only obligated to sell a repossessed car in a “commercially reasonable manner,” it may auction the car off at less than its retail value. For example, if you have $18,000 left to pay on your car when it’s repossessed, and the finance company sells the car for $16,000, you have to pay the finance company $2,000. The $2,000 is the deficiency judgment. Adding insult to injury, you’ll also have a poor credit rating as a result of not paying your loan, which means you’ll have trouble buying a replacement vehicle.

Creditors who are pursuing repossession have to follow a few rules. Such as, the car may be towed from in front of your house, but the creditor may not break into your garage to get your car. Also, if a creditor loaned you money to buy a car, then the creditor can only repossess the car. The creditor cannot keep other items that might be in the car when it is repossessed.

Repossessions Can Happen Quickly
Finance companies normally aren’t obligated to send letters warning you that your car may be repossessed. While they will write first to inform you of a delinquent loan, they may have a right to repossess your car if your payment is even one day late following the grace period.

Avoiding Repossession
To avoid the unpleasantness of repossession, call your lender immediately if you don’t think you’ll be able to make a loan payment within the grace period. In many cases, the lender will try to figure out a payment plan that you can stick to. But if you don’t call right away, the lender may be less forgiving.

Insurance

Once you’ve narrowed down the car models you’re considering, call several insurance agents to ask for insurance price quotes.

Insurance rates always vary based on age, sex, marital status, driving record, where you live, the number of miles you drive to and from work, and the number of miles you drive annually, as well as your vehicle’s age and value. In short, if you’re considered low risk, you’ll pay less. If you’re, say, a married couple with a teenage son at home, you’re considered a high risk and will pay more than average.

Required Insurance

In Minnesota, the minimum insurance you are required to carry includes:

• $30,000 per person and $60,000 per accident for bodily injury (This covers claims against you in addition to your legal defense if your car injures or kills someone.);
• $10,000 property damage liability (This amount is paid for claims and defense costs if your car damages another person’s property.);
• $40,000 for personal-injury protection (PIP) (This covers your medical costs if you are in an accident.); and
• $25,000 per person and $50,000 per accident for uninsured/underinsured coverage (This pays the medical expenses of those in your vehicle in the event they are injured by an uninsured or underinsured motorist.).

The following are also required by lenders for the duration of a car loan:

• Collision insurance (This pays for damage if your car is in an accident.); and
• Comprehensive physical damage insurance (This covers damage if your vehicle is stolen or damaged by fire, flood, or another disaster.).

Additional Insurance to Consider

Pay for more insurance? Yes. You may want more than the minimum that’s required, including:

• Medical payments insurance (This pays for medical expenses of the driver and passengers in your car who are injured in an accident.);
• Towing (If your car stalls or is in an accident, towing is covered.); and
• Car rental insurance (When your car is being repaired, you can collect insurance to pay for a rental car.).

Seven Ways to Lower Your Insurance Costs

The Insurance Information Institute in New York offers the following tips to reduce your insurance payments:

1. Comparison shop. Shop for both fair prices and excellent service. Narrow the field by asking friends and relatives about their rates and and using the Insurance Comparison Worksheet for an estimate of rates.
2. Ask for higher deductibles. Deductibles are the amount you pay out of pocket before your insurance company covers a claim. By increasing your deductible from $200 to $500, you could reduce your collision and comprehensive coverage cost by 15 to 30 percent.
   
3. Drop collision and/or comprehensive coverage on older cars. For cars worth less than ten times the cost of coverage, it may not be worthwhile to carry collision or comprehensive coverage. Your deductible and premiums paid may be equal to or more than the value of the car.
   
4. Buy a low-profile car. Cars with high incidences of collision or theft, or those that are associated with a high rate of injury, may cost more to insure than those considered safer or less sought after by thieves. The Insurance Institute for Highway Safety (IIHS) has information regarding loss statistics and motor vehicle safety. Contact the IIHS Communications Department at 1005 N. Glebe Road., Suite 800, Arlington, VA 22201, phone (703) 247-1500, or view the information available on its website at www.iihs.org.
5. Take advantage of low-mileage discounts. Some insurers offer discounts to motorists who drive less than a predetermined number of miles per year or those who carpool to work.
6. Find out about automatic seat belt or air-bag discounts. You may receive a discount for having safety devices, such as airbags, anti-lock brakes, daytime running lights, or anti-theft devices.
7. Ask about other discounts. Other possible discounts may be given for owning more than one car, having no accidents in three years, being more than 50 years old, taking driver training courses, installing anti-theft devices, having anti-lock brakes, being a nonsmoker, and even being a good student.

From the Insurance Information Institute, New York, NY. For more information, visit www.iihs.org.

Licensing Fees and Tax

It may be a relief to know that there are two fees that are not negotiable, motor vehicle sales tax and licensing fees! Motor vehicle sales tax in Minnesota is currently 6.5 percent (although some municipalities and counties may add an additional $20 vehicle excise tax). And the state has set licensing fees for the type and year of each vehicle. To check the licensing fees on a car you’re considering buying, contact the Minnesota Department of Public Safety Driver and Vehicle Services Division at (651) 297-2126.

Flexible Costs

Fixed costs are the same whether you travel 30 or 3,000 miles a month, but flexible costs are tied directly to your use of the vehicle. These are costs for gasoline, oil changes, car washes, protective maintenance, periodic repairs, and depreciation.

The depreciation depends on the value of your car, which is influenced by its age and the number of miles you’ve put on it. You’ll have to guess a bit on this cost. Determining other flexible expenses is easier, especially if you’ve already owned a car. If you’ve never owned a car, information is available at the library or on the Internet, including the Kelley Blue Book “5-Year Cost to Own” research tool (www.kbb.com) and the Edmunds “True Cost to Own” pricing system (www.edmunds.com).

Fuel Costs

To figure how fast you’ll empty your wallet by filling your tank with gasoline, first determine how many miles you drive per month. If you haven’t owned a car, you’ll have to make an educated guess. Then ask a dealer or consult a car book to determine the gas mileage of the car you’re considering buying.

Example: 1,000 miles ÷ 30 miles per gallon x $3.00 per gallon of gas. Rounded off, that’s 33 x $3.00, which equals $100.00 per month. (Multiply by 12 for the yearly gas expense. In this example, you would pay $1,200.00 for gasoline for the year.)

Tires, Maintenance, and Repairs

Finally, figure in the expenses of buying new tires every few years and paying for general maintenance every year. Maintenance may be as simple and inexpensive as quarterly oil, fluid, and filter changes for the first few years you own a new car. If you plan to buy a used car, you’ll want to set aside more money for maintenance and repairs.

An Appreciation for Depreciation

While not an out-of-pocket cost, depreciation is the biggest expense you’ll have on an automobile, especially a brand-new one. Depreciation makes up more than half the cost of owning and operating a new vehicle.

A new car can lose between several hundred and several thousand dollars in value the minute you drive off the dealer’s lot. About 20 percent of depreciation costs occur within the first year. Even so, you really won’t feel the sting of depreciation unless you sell your car soon after you buy it.

It’s impossible to know exactly how much a car will depreciate because so much of its value is wrapped up in its popularity. But the “blue book” will give you an idea, as long as this isn’t the first year the model has been sold. Look up previous years’ models to see how they’ve held their value.