Understanding "Dream Vehicle" Cost Helps Keep You in the Driver's Seat

by Darla Dernovsek

Understanding the true cost of your dream vehicle may be the best way to stay in the driver's seat as you search for a purchase that reconciles your desires with your pocketbook.

The desire to own a high-ticket vehicle continues to drive many purchasers, according to C. Dana Rawlings, senior vice president/chief operating officer of Smart Financial Credit Union, Houston; Mark Wilburn, senior vice president and chief lending officer at 66 Federal Credit Union, Bartlesville, Okla.; and Keith Kauffeld, vice president of operations, Air Academy Federal Credit Union, Colorado Springs, Colo.

The point is, the sticker price of a new vehicle is just one element of its total cost. Its overall impact on your long-term budget will depend on loan terms, operating expenses, insurance, rebates, and even supply and demand. These factors can increase the cost of the car even as they decrease its value, sometimes before it leaves the dealer's lot.

Higher price tags
Like most credit unions, all three credit unions routinely handle requests to finance vehicle purchases of more than $30,000, including some vehicles with price tags of $60,000 to $80,000 or more. Texans' fondness for big vehicles means that 35% of Smart Financial Credit Union's loans are for vehicles that cost $40,000 or more, Rawlings says.

The monthly payment for a 60-month vehicle loan on a fully financed $40,000 purchase at an interest rate of 4.5% will be $746, although experts say higher interest rates quickly can push payments up. For example, a 7% interest rate results in monthly payments of $793. That's a difference of $2,820 over the life of the loan. You can figure out the cost of your monthly payment by using this payment calculator.

Generally, experts advise buyers to avoid spending more than 15% to 18% of their monthly income on total vehicle costs. The sticker price is just the beginning of these costs. Kauffeld says the sticker price typically excludes some costs such as extended warranties, dealer handling fees, "protection packages" of sometimes dubious value for services such as "invisi-shield," title fees, and state sales taxes, where applicable.

"Over and above taxes, we usually see $500 to $2,500 in these ‘adds' on most purchases," Kauffeld says.

The cost of insurance is likely to rise with the cost of the vehicle, especially if the model is deemed more likely to be stolen or involved in an accident. Ask your insurance agent for a quote. Gasoline costs are another ongoing expense, especially on larger models with high gas consumption. Opting for a global positioning system (GPS) to obtain directions or roadside assistance can create an additional monthly charge once the free trial period ends.

Wilburn notes that many owners also are unaware of the higher costs of routine service and repairs for luxury cars, which sometimes can cost twice as much to service when compared with more mundane vehicles.

Longer terms
Some buyers attempt to manage the cost of high-end vehicles by extending the term of the loan. Sixty months was once the longest term offered on standard vehicle loans, but many lenders now offer extended terms. At 66 Federal, the longest term available is 72 months, while Smart Financial and Air Academy Federal offer 84-month vehicle loans. Generally, most lenders charge an additional one percentage point for each year added to the term beyond 60 months.

"Extending the term costs the borrower," Kauffeld says. On a $30,000 loan, Kauffeld says the 60-month option with an interest rate of 3.99% would result in monthly payments of $553 and a total finance charge of approximately $3,146 over the life of the loan. Extending the term to 72 months reduces the monthly payments to $483, but increases the interest rate to 4.99 % and results in a total finance charge of $4,781.

Increasing the length of the loan also may contribute to the problem of being "upside down" in an automobile loan. "Upside down" buyers owe more to the lender than the vehicle is worth. This can occur because the buyer has little or no down payment, the term of the loan is so long that the vehicle depreciates faster than the buyer accrues value through payments on the principal, the manufacturer offers rebates that reduce the vehicle's resale value, or because the popularity of a new vehicle model creates an oversupply in the used market.

"Even if you got a good deal on the vehicle's price, you can be upside down," Rawlings says. "It really depends on the supply and demand of the car." One popular Web site for determining vehicle depreciation is the Automotive Leasing Guide. The Edmunds.com also can help you determine vehicle values and costs.

Comparing cost and value
Understanding the difference between a vehicle's cost and its market value can help a buyer prepare for the consequences if the vehicle is damaged or stolen.

"Remember that once a new auto is purchased, it immediately becomes a used auto and loses significant value the minute you drive it off the lot," Kauffeld says. A buyer whose car is damaged in an accident or taken by thieves may discover that the amount they owe on the loan is thousands more than their insurance coverage, which typically is based on the vehicle's current market value. Many credit unions sell guaranteed automobile protection (GAP) insurance to cover the difference between the amount paid by insurance and the amount owed to the lender.

In the worst-case scenario, failing to repay the full amount you owe on a vehicle loan can cost you for years. For example, Wilburn says one member used a credit union loan to purchase a $35,000 sports utility vehicle in 2004. Six months later, the member gave the keys to the credit union because the combined cost of monthly payments, gasoline, and insurance proved overwhelming. The negative impact on the member's credit rating for failing to repay the loan is likely to increase her loan interest rate from the 4.5% range common in mid-2005 to the 15% to 21% offered to buyers with an undesirable credit history.

"Even insurance companies base their rates on credit reports, so car insurance will be higher, too," Wilburn says. "There's just a ton of ramifications."

Exploring options
If the true cost of driving your brand-new dream car appears to be too much for your budget, check into other options. Car buying services some credit unions offer can help you get the best deal available. Used vehicles can provide an attractive alternative, especially because rapid depreciation on many luxury cars helps create good deals on used cars. Low-mileage used vehicles that are "certified" by dealers often include warranties that cover many repair costs.

Whatever route you take, experts agree that doing your homework will pay off. For example, understanding the trade-in value of your used car helps you negotiate a fair price with the dealer. Meeting with a credit union loan officer before you visit the dealer will help you decide how much car you can afford, help you obtain a competitive interest rate, and prequalify for a loan.

"The more knowledge you have, the more power you have to negotiate," Rawlings says.


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