Skip to main content Skip to chat

Car loan cost, beyond monthly payments

October 15, 2019

Written by Preet Banerjee

Key takeaways

  • What seems affordable on a regular payment basis might be a lot more expensive than we realize in the long term.

  • If you’re paying $400 a month for a used car over three years, that’s $12,000. Over eight years, that’s $30,000.

  • Take a look at the big picture, including what you’d do with the money you can save from a less expensive, shorter term loan.

Car loan cost, beyond monthly payments | Tangerine

If I told you my dinner last night cost five dollars per month, you would have a lot of questions.

You'd probably wonder, "who thinks of the price of a meal in terms of monthly payments? How many monthly payments?" If it were only one payment, that might seem cheap. If it was over 60 months, you'd wonder if the meal­ was drizzled with gold flakes. You'd also likely wonder what the cost would've been if I had just paid for it all at once.

You don't have enough information to figure out if this was a good deal or not.

Monthly payments don't tell the whole story

We don't talk about meals in terms of monthly payments, but we do for car payments. It's not unusual to walk into a car dealership and have the conversation quickly steer to the monthly or bi-weekly payment amount that seems affordable.

I've even had a navigation system option quoted as a $1.93 per weekly payment. It sounded trivial until I realized it added $500 to the purchase price. Framed that way, it seems expensive compared to standard GPS options on most smartphones.

The monthly payment is only one piece of the puzzle

What seems affordable on a regular payment basis might be a lot more expensive than we realize in the long term. It can also lead us to spend more than we might otherwise think is reasonable.

Here's an example:

Let's say you figure you could manage a monthly payment of around $400. A three-year loan means you're looking for a car worth around $12,000, factoring in taxes and the going rate for auto loans.

You'd probably be looking at either an entry-level, sub-compact car, or a wider range of vehicles in the used market. But that same monthly payment can translate into a $30,000 purchase price if your loan spanned 96 months (eight years). And long car loans are becoming more prevalent.

Focus on the total cost

If we focus only on the monthly payment amount, we don't get the full picture.

Think about three years of payments versus eight years:

If you pay for a used car over three years, you're going to feel the joy of no car loan payments for the last five years. You might budget some money for the extra maintenance costs of owning a used car, but you might also save on insurance costs, since less expensive cars tend to be less expensive to insure.

Five years of not paying $400 per month to a loan is $4,800 per year, or $24,000 in total.

This money could go to other things in your life. Like paying off your student loans. Or saving up for a down payment on a home. Or retirement. Or vacations. Even after factoring any extra maintenance costs, you'll still have money left over.

Determine your affordability

Although it's important to make sure your regular car payments fit into your budget, it's also important to remember to take a look at the big picture when determining your true affordability.

 

This article or video (the “Content”), as applicable, is provided by independent third parties that are not affiliated with Tangerine Bank or any of its affiliates. Tangerine Bank and its affiliates neither endorse or approve nor are liable for any third party Content, or investment or financial loss arising from any use of such Content.

The Content is provided for general information and educational purposes only, is not intended to be relied upon as, or provide, personal financial, tax or investment advice and does not take into account the specific objectives, personal, financial, legal or tax situation, or particular circumstances and needs of any specific person. No information contained in the Content constitutes, or should be construed as, a recommendation, offer or solicitation by Tangerine to buy, hold or sell any security, financial product or instrument discussed therein or to follow any particular investment or financial strategy. In making your financial and investment decisions, you will consult with and rely upon your own advisors and will seek your own professional advice regarding the appropriateness of implementing strategies before taking action. Any information, data, opinions, views, advice, recommendations or other content provided by any third party are solely those of such third party and not of Tangerine Bank or its affiliates, and Tangerine Bank and its affiliates accept no liability in respect thereof and do not guarantee the accuracy or reliability of any information in the third party Content. Any information contained in the Content, including information related to interest rates, market conditions, tax rules, and other investment factors, is subject to change without notice, and neither Tangerine Bank nor its affiliates are responsible for updating this information.

Tangerine Investment Funds are managed by Tangerine Investment Management Inc. and are only available by opening an Investment Fund Account with Tangerine Investment Funds Limited. These firms are wholly owned subsidiaries of Tangerine Bank. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.