Hidden Finance Costs When Buying a Used Car(USA)

By Russ Heaps 01/19/2023 4:00pm

Cash in a wallet by a car


Quick Facts About Overlooked Costs When Buying a Used Car

  • Paying a higher interest rate can cost you significantly.
  • When researching the price of a used vehicle, remember to include the sales tax.
  • Registration fees also figure into a used car’s final cost.

We’ve all heard the old saying, “There’s more than meets the eye.” So it is in a discussion of the hidden financial costs when buying a used car. However, it’s not so much hidden costs as costs you simply may not have considered.

Most of us don’t invest the time we should researching a vehicle purchase. If we can afford the monthly payment, what’s the difference, right? Sometimes, though, it’s the little things that inflate those monthly payments or stretch them out farther than you can see.

What we share with you here may not save you a wheelbarrow full of money, but it could save you some or at least help you focus on the out-the-door price. With inflation stubbornly high and the economy shrinking, every dollar saved is a dollar to spend on essentials.

Let’s take a look at a few factors that can jack up that monthly used car loan payment.

Interest Rate on Used Car Loans

Perhaps the biggest behind-the-scenes finance cost is the interest rate. There is no question that car loan interest rates of all stripes (new, used, and certified pre-owned) have taken a significant upward turn. According to Bankrate.com, the average interest rate for a 48-month used car loan in January 2023 was 6.8% APR (annual percentage rate). In mid-October 2022, it was 6.2%. The best rate in October was 3.69% for borrowers at the top of the credit-score scale. Those with credit scores of 500 or lower faced 19.81% rates.

Bankrate’s forecast for the remainder of 2023 is a used car rate of around 8% for those with a better-than-average credit score. A critical task in shopping for your used car is to secure the lowest interest rate possible. You can only achieve that by shopping several different lenders.

What Difference Can the Interest Rate on Used Car Loans Make?

Finding the best interest rate on your used car loan can save you hundreds of dollars over the length of the loan. Autotrader is a sister company to Kelley Blue Book. We went to its Car Loan Payment Calculator and input a few different interest rates to determine their effect on monthly payments for the exact same vehicle.

Our example car is a 2020 Toyota Camry SE with a 4-cylinder engine priced at $21,995, which we found among our Cars for Sale. We began with Bankrate.com’s current average interest rate of 6.8% for a 48-month loan with a 20% down payment of $4,399. So, in our example, we’re financing $17,596.

  • Loan Option 1: 6.8% APR — $420 per month for 48 months with a total interest paid of $2,551.
  • Loan Option 2: 7.3% APR — $424 per month for 48 months with a total interest paid of $2,747.
  • Loan Option 3: 8.0% APR — $430 per month for 48 months with a total interest paid of $3,023.

Although there’s not much sunshine between the monthly installments, the extra interest paid does add up.

RELATED ARTICLE: How to Buy a Used Car in 10 Steps

Sales Tax

Unless you live in Delaware, New Hampshire, Montana, Alaska, or Oregon, the car dealer must pay a state sales tax on your vehicle purchase, which the dealer passes to you. This tax varies from state to state, and the rate may differ for vehicles from other commodities. Some local governments tack on a sales tax, as well. Your research should include determining which sales taxes are required.

Purchasing a vehicle out of state may add even more expense. You should pay the sales tax to the state where you live (if it assesses a vehicle sales tax). However, you may have to purchase a temporary registration in the state where the vehicle is purchased.

At 8.25%, Nevada leads the nation for the highest tax rate on cars. Kansas (7.5%) and California (7.25%) follow close behind. How does the sales tax influence your used car loan? If you live in South Carolina with a 5.0% vehicle sales tax rate, it adds $1,452 to the bottom line purchase price and would bump up the monthly payment in our Loan Option 1 scenario from $420 monthly to $454 per month.

Registration and Licensing Fees

Registration and licensing fees vary wildly from one state to the next. Still, those fees won’t add much to your used car’s purchase bottom line, but they will cost something. For example, in Arizona, the registration fee is a flat $40, while in Florida, registering the vehicle costs $225 plus another $14.50 to $32.50 based on the vehicle’s weight.

RELATED ARTICLE: Buying Used vs. Certified Pre-Owned Vehicles

Leasing Fees and Penalties

Leasing is entirely different from financing. Although leasing a used car isn’t all that common outside of certified pre-owned (CPO) purchases, there are used car leases.

Our advice on interest rates still applies; however, in leasing terminology, interest is called the money factor and the figure is displayed differently. There will be sales tax and licensing fees, as well.

Leasing contracts have a long list of mandatory and seemingly unwarranted fees of which you should be aware. Moreover, as you close out a lease, several potential penalties can add hundreds of dollars to the final bill.

The List of Lease Fees and Penalties

  • Acquisition Fee: This is what the lessor charges for setting up the lease. It can include a variety of fees, such as documentation fees, license-plate costs, registration fee, and so on. You won’t be able to negotiate it away but you can fold it into the lease.
  • Mileage Cap: Also called “allowable mileage,” this isn’t really a fee but can cost you extra money at the end of the lease. Leases indicate that you must drive less than a specified number of miles. Usually, it’s in the neighborhood of 12,000 miles annually. For a 3-year lease that’s a total of 36,000 miles. Each mile over and above that mileage cap will cost you a predetermined per-mile penalty.
  • Disposition Charge: This is a fee to clean and dispose of your car at the end of the lease. You may be able to negotiate it away.
  • Early Termination Fee: Breaking a lease contract before the contractual end of the lease can cost you dearly. The penalty can be as much as the total of the lease’s remaining payments. Always ask how the lessor handles early termination.
  • Drive-Off Fees: These are any other upfront fees due, and likely the first month’s lease payment, required to begin the lease. Any included fees should be itemized. You may be able to negotiate away those that are simply dealer paper-shuffling fees.
  • Damage Fees: A lessee is responsible for anything beyond the lessor’s definition of normal wear and tear. In other words, when you return the car, you’ll be on the hook for any repairs the lessor deems are over and above normal. What is normal? Basically, it’s subjective and up to the dealer taking in the car at the lease end.