Finding Smart Ways to Reduce the Cost of Car Ownership
Transportation costs are usually the second biggest expense in a household budget after housing. And while these costs are necessities because you need to get around, there are steps you can take to reduce them.
Penny Wise drivers understand that getting around can get expensive. The average buyer spends about 18% of their budget on transportation.
Penny Wise makes sure to budget for all auto costs, not just the loan payment. Pound Foolish fails to calculate for other costs, such as insurance, taxes, fuel, maintenance and repairs. Pound Foolush doesn’t realize that over a lifetime, drivers pay half a million dollars on vehicles. But Penny Wise uses these tips to keep car costs low.
Tip number one: Consider refinancing.
If you’re Pound Foolish, you pay off a loan and never consider refinancing. But Penny Wise knows that with good credit, you can refinance at a lower interest rate to save money. Penny Wise always goes for a simple interest loan with no early repayment penalties.
Tip number two: Maintain good credit
Penny Wise also knows that credit scores affect how much you’ll pay for auto insurance. So, you must be Pound Foolish not to take steps to boost your score to refinance and reduce insurance costs.
Tip number three: Downsize or scale back
Pound Foolish buys cars that are flashy to keep up with the Joneses. They’d rather run into financial distress than downsize to a smaller vehicle. But the Penny Wise know that scaling back can prevent car costs from squeezing your budget.
In fact, they at least try giving up a vehicle completely for a month, using public transit, walking, ride sharing, taking taxis, a renting a car when they need a new set of wheels. Because while renting cars and taking cabs can seem expensive, it may be less costly than the $7,500 annual cost it takes to keep the average vehicle.
Pound Foolish never looks at scaling back and drive their vehicles even when public transportation would be cheaper. They pay more to get everywhere, even using long-term parking at airports and meter parking when they go out of town.
Tip number four: Get the right coverage
One in three drivers is also a little Pound Foolish, because they don’t know how much they pay to insure their car. Penny Wise drivers understand that the cost of insurance can vary by up to $500 among different insurers. So, they call at least three companies to ask for quotes and shop around each year. And they ask their agent for discounts when they get a new security system or get married or take a drivers’ safety class.
It’s also Pound Foolish to trust that an insurance company can pay if you have a claim. Penny Wise checks Standard and Poors for insurance company ratings. Pound Foolish doesn’t even check to make sure they have enough coverage. One bad accident or even a slight fender bender can wreck their finances.
Penny Wise understand types of coverage and knows the whole point of insurance it to take care of losses they can’t afford. And if increase coverage makes that policy more expensive, Penny Wise knows that raising deductibles can offset the added cost.
For more Penny Wise money-saving tips, visit ConsolidatedCredit.org
This is how transportation costs break down in the average American budget:
- 42% gets spent on the vehicle for auto loan payments and
- 21% gets spent on gas, oil and maintenance
- The other 37% is spent on everything else, such as insurance
If you want minimize transportation costs in your budget, we recommend following these steps…
Step 1: Consider where you live
Finding the cheapest transportation depends heavily on where you live. The cost of car ownership in cities like New York City are astronomical compared to the cost of using public transit. But if you live in a suburb or rural area in the flyover states, then public transit may be either too inconvenient or too expensive.
This is why we recommend that drivers try going carless for at least one month to evaluate the cost savings.
- Walk or ride a bike whenever it’s reasonable to do so
- Take the bus or consider carpools to get to work
- Use ride sharing or taxis when you need a trunk, such as when you shop for groceries
This may sound expensive. But remember, eliminating your car will get rid of your car payment, car insurance payment, fuel and maintenance costs, as well as money used for parking and tolls. Total up the expenses for one month of driving, then compare it to what you pay to get around without a car.
Step 2: Never be satisfied with your payments, even if you’re not financially stressed
People often get complacent with fixed costs in their budgets. You get used to paying a certain amount, so as long as you’re not struggling you don’t consider reducing costs. But this means you could be shelling out more money than necessary every month. So, you should never be satisfied with your payments – you should always try to aim to reduce payments, when possible.
- If you still have a few years left on your auto loan, consider refinancing to see if you can get a lower interest rate. Lower rates mean lower payments. This is particularly good advice if your credit score has improved since you took out the loan.
- See about making extra payments or larger payments. Making higher payments or an extra payment means that you pay off your loan faster. Just make sure your loan doesn’t have early repayment or prepayment penalty fees. If it does, then you should stick to the schedule.
- Shop around for auto insurance once per year. Get quotes from three different companies, in addition to your current provider.
- Call your agent anytime you think there’s an opportunity for a discount. Auto insurers offer discounts for a range of events and situations that you may not think of, including:
- Getting married
- Taking drivers under age 25 off your policy as your children gain financial independence
- Driving a “low mileage” amount each year
- Installing a security system on the vehicle
- Safe driving bonuses
Step 3: Be frugal behind the wheel
Always look for ways to avoid added costs when you’re on the road, including:
- Meter parking
- Paid parking lots
If you regularly use toll roads, consider your route carefully and see if there’s an alternate route you can take. Just make sure you’re not wasting gas to go out of your way. Avoid metered parking, even if you have to do some extra walking to get to your destination.
And consider using public transportation or ride sharing to avoid parking lot fees. This is particularly important for expensive lots, such as long-term airport parking, sporting events, and concerts. If you have to pay to park, getting dropped off may be the better option.
Step 4: Maintain your vehicle
It might seem like skipping routine maintenance can save you money, but it doesn’t. In fact, you’re more likely to face expensive car repairs and incur other expenses, such as towing, when your car breaks down. Even gas mileage is negatively affected by skipping maintenance. So, make sure to follow all of the recommended manufacturer recommendations for routine maintenance on your vehicle.
You should also have an emergency fund in case you need car repairs. Each month, set aside $20 or whatever you can afford to save for a vehicle emergency fund. Then, when you pay off the loan, up your emergency savings with what you were paying on the car payment. Since manufacturer warranties tend to expire around the time you pay off the loan, this gives you a cushion of cash to use if something expensive breaks down. It also lets you skip the unnecessary cost of an extended warranty.
And know when to say when on car repairs. Getting rid of a vehicle because of one expensive repair, such as a new transmission, may not be as cost effective as you think. But if you’re constantly shelling out money on repairs, then it may be time for a trade-in.
Step 5: Finance your next vehicle wisely
If you live in one of the many places where it’s just not feasible to go without a vehicle, then eventually you’re going to need a new car. When you do, make sure you’re getting the best deal for your financial situation.
- Make the largest down payment possible, since this will reduce your total costs and monthly costs.
- Avoid loans with early repayment or prepayment penalty fees. If you come into extra cash, you want to be able to pay off your loan without penalties.
- Get prequalified for an auto loan at your bank or credit union before you hit the dealership. This lets you know how much car you can afford and gives you something to compare dealership offers against.
- Evaluate the total cost of dealership offers carefully. No money down or 0% APR for a few months may sound great, but often the total cost of these attractive dealership offers is higher.
- Don’t just assume that leasing is less expensive. Leasing a car can be a good value if you trade in cars every few years. Just be aware that extra fees can pile up quickly if you drive too much or don’t maintain the vehicle.
Have a question about cutting costs or auto loans? Ask our financial coaches to get the answers you need from a certified expert.