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Hidden Costs of Buying a Used Car: Financing

When buying a used car, smart consumers recognize that hidden used car costs make the decision-making process more than simply getting a competitive price or a low monthly payment. Comparing vehicles based on selling prices and payment quotes is just one way to determine whether a vehicle will prove affordable during ownership. In addition to price and payment, variables that impact the total cost of buying and owning a used car include:

  • Loan interest rate, when financed
  • Leasing charges
  • State and local tax rates
  • State licensing fees

To ensure your used car, truck or SUV provides maximum value at minimum cost, it is important to consider all hidden used car costs.

Loan Interest Rates

When financing a vehicle, a monthly payment is made for a predetermined number of months. The monthly payment amount varies depending on the amount of the cash down payment, the length (or term) of the loan and the loan’s interest rate. Typically, loans for used cars carry higher interest rates than those for new cars.

To reduce the monthly car payment, a car buyer can make a bigger down payment, extend the term of the loan and find financing with a lower interest rate. Let’s take a look at how modifying these variables can impact the monthly payment for a used 2010 Honda Accord EX Sedan with a 4-cylinder engine and a selling price of $17,400.

Loan Option #1: Zero down, 48-month financing, 5 percent APR = $400.71 per month

Loan Option #2: $1,500 down, 48-month financing, 5 percent APR = $366.17 per month

Loan Option #3: $1,500 down, 48-month financing, 6 percent APR = $373.41 per month

Loan Option #4: $1,500 down, 60-month financing, 6 percent APR = $307.39 per month

When deciding which used vehicle to buy, be absolutely sure you are comparing vehicles using identical down payment amounts, loan terms and loan interest rates.

Source of values: Loan calculator on

Leasing Charges

Though it happens infrequently, some people lease used cars. If you are leasing a used vehicle, the equivalent of an interest rate is applied to calculate the monthly lease payment. This is known as the money factor, and it is expressed as a very small number that can be converted into a conventional interest rate by multiplying the number by 2,400. The smaller the money factor, the lower the equivalent interest rate.

Using a certified pre-owned 2010 BMW 328i selling for $26,000 as an example, let’s see how a change in the money factor impacts the monthly payment for a 36-month lease with a $2,500 capitalized cost reduction (down payment), a 50 percent residual value (value of the car at the end of the lease) and a driving limit of 12,000 miles per year.

The first lease payment is written using a money factor of 0.0036, which translates to an 8.64 percent interest rate. A buyer selecting this deal will pay $423.07 per month for the lease. If this person negotiated the best lease rate and could obtain a money factor of 0.0028 (6.72 percent), the payment for this BMW would drop to $393.87 per month.

When comparing lease payments between vehicles, be sure to use the same values for the cash down payment (capitalized cost reduction), the lease term and the annual mileage limit to help you make the best decision.

Source of values: Lease calculator on

State and Local Tax Rates

Buying a car in a different city or county within the same state or in a neighboring state rarely helps you save money on sales tax. Most states and cities require car buyers to pay sales tax based on their place of residence rather than where a vehicle was purchased. In fact, buying a used car out of state sometimes requires a temporary license plate from the state in which the car is sold, which can actually add to the cost of the vehicle.

If you are considering buying a car far outside your area of residence, be sure to carefully examine all potential tax benefits and determine any hidden tax pitfalls resulting from the deal. Also, remember that taxes are based on the selling price, so choosing a less expensive vehicle can lower the amount paid in taxes.

Additionally, while the federal government and some local governments offer tax credits for plug-in hybrid models and electric vehicles, these credits are offered only to the original vehicle owner when the vehicle is purchased new. They do not apply when buying a used hybrid or electric vehicle.

State Registration and Licensing Fees

Each state sets its own registration and licensing fees. These fees often are the same regardless of what type of vehicle is registered and licensed. In some states, however, fees vary depending on age of the vehicle, purchase price, taxable value, weight, owner’s driving record, whether the car has a lien against it and other factors.

For example, in Utah, license plates cost $43 annually regardless of whether the vehicle is new or used, how old it is or its value at the time of registration. Neighboring Colorado, in contrast, bases license plate fees on the vehicle’s age, weight and taxable value. That means residents of Denver can save money by choosing an older, lighter and less expensive model, while residents of Salt Lake City need not be concerned with such details.

Source: National Conference of State Legislatures

In part 2, we’ll cover even more hidden costs, including insurance premiums, fuel economy, maintenance and depreciation.


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