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How Much Should You Budget For A New Car?

budgeting for car loan

A new car is one of the biggest purchases in an average person's life, perhaps second only to a home. And as of this year, CNet mentions that the average price of a new car is now at least $40,000. But that’s only the cost of buying the car. The AAA states that on top of the purchase price, car owners spend almost $10,000 annually for upkeep. Among the factors that contribute to this are fuel and maintenance.

Budgeting for a new car isn't just limited to the car price, there are also more immediate hidden costs. If you’re saving up and setting a budget for a new car, here are some things to account for as well:

Dealership fees

Dealership fees cover a range of payments. For one, registration fees are costs for the title and license, averaging around $8 to $225. Meanwhile, the documentation fee pays the dealer to complete the paperwork related to the sale of your car, such as sales contracts and filings with the DMV, which can set you back $55 to $700. The destination fee, which is around $700 to $1,000, covers the cost for the manufacturer to transport your new car from the factory to the dealer lot.

However, some dealers may try to increase their profits by piling on additional fees. For example, the dealer prep fee can be around $100 to $400, and is supposedly for preparing the vehicle — which should already be part of their services. also talks about how some companies are increasing destination fees without a detailed breakdown of their calculations. As a rule of thumb, when a cost isn't reflected in the manufacturer invoice, you should negotiate to drop the fee. Or you can also haggle the price of your car to offset the fees.

Car insurance

Car insurance gives you some financial protection in case of an accident. Basic car insurance coverages include personal injury protection, comprehensive coverage, and collision coverage. However, these protect only the insurance holder, and suggests that you should also get third-party insurance. Also called liability coverage, this financially protects a third party in an accident. There are two kinds of third-party insurance — bodily injury coverage, which compensates a person affected by an accident caused by the insured, and property damage coverage, which pays for property damage caused by the insured.

Aside from the basic coverages, you can also opt for add-ons for better protection. For instance, roadside assistance ensures that you get aid and help if the insured car breaks down on the road. The average cost of car insurance is $1,674. However, you might pay more or less depending on where you live, which insurance company you choose, and what coverage you opt for.

Finance charges

When you take out a loan to buy a car, this comes with a financing charge, which is the total amount you pay to get the loan. This includes the interest and origination fees, which the lender charges to process the loan. The interest rate is what you’d be most concerned about, as it’s determined by factors such as your credit score and the type of car you want to buy.

Our Debt To Income Ratio — Why Should I Care? article also discusses that it’s not enough to have a stable income and pay debts on time. You'll also need to be wary of your debt-to-income ratio — the percentage of your gross monthly income that’s used to pay monthly debts — because the higher it is, the less disposable income you have, so the less likely you are to get a loan. A few ways to lower the ratio are avoiding taking on new debt for the time being and working on lowering principal balances on your credit cards and debt.

With a new car comes additional costs, from dealership fees to financing charges. It’s important to take these into account so you don’t get taken by surprise and spend more than you ought to. For more financing pointers, check our blog here on

Article written by Rose Judd

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