← Money Basics After High School · about 50 min
Buying a car
The price tag is only the start. Here's what a car really costs.
Total cost of ownership
AAA estimates the average new car costs about $11,577 a year to own and drive (2025 study). The biggest single cost isn't gas. It's depreciation, the value the car loses, at about $4,334 a year.
- Depreciation: new cars lose value fastest in the first few years. A used car lets the first owner take that hit.
- Insurance: required, and higher for young drivers and expensive cars. Get a quote before you buy.
- Gas or charging, maintenance (oil, tires, brakes), registration, and parking.
- Interest, if you take a loan.
Cash, loan, or lease?
| Way to pay | How it works | Watch out for |
|---|---|---|
| Cash | Pay the full price. No interest, no payment. | Don't drain your emergency fund to do it. |
| Loan (financing) | Borrow, pay monthly with interest, own the car at the end. | Long terms (72–84 months) mean more interest and owing more than the car is worth. |
| Lease | Rent a new car for 2–4 years, then give it back. | Mileage limits, wear charges, and you own nothing at the end. |
Worked example: the long-loan trap
A used car costs $18,000 after tax and fees. You put $2,000 down and borrow $16,000 at 8% APR. Compare a 36-month loan to an 84-month loan.
- Monthly rate
8% ÷ 12 ≈ 0.6667% = 0.006667 - Payment formula
Payment = P × r ÷ (1 − (1 + r)^−n) - 36 months
$16,000 × 0.006667 ÷ (1 − 1.006667^−36) = $501.38/month - 36-month total interest
$501.38 × 36 − $16,000 = $2,049.68 - 84 months
$249.38/month, and $249.38 × 84 − $16,000 = $4,947.92 interest
The 84-month loan "saves" $252 a month but costs $2,898.24 more in interest, and you'd still be making payments on a 10-year-old car.
Try it
Auto loan calculator
| Term | Monthly payment | Total interest | Car really costs |
|---|
The bars show total interest. A longer loan lowers the monthly payment but costs more in the end, and the car keeps losing value the whole time.
At the dealer
- "What monthly payment are you looking for?" Don't answer. Negotiate the out-the-door price (with all taxes and fees), then talk financing.
- Add-ons (extended warranties, paint protection, VIN etching) are optional. You can say no.
- Test drive on the highway and on bumpy streets. Test the brakes, A/C, heat, windows, and lights.
- For a used car, run a vehicle history report and pay a mechanic you choose for a pre-purchase inspection (often around $100–$200). It can save you thousands.
- You can always walk away. Another car will come along.
Practice
You borrow $10,000 at 6% for 48 months. The payment is $234.85. What's the total interest?
Show answer
$234.85 × 48 = $11,272.80. $11,272.80 − $10,000 = $1,272.80.
A car bought for $25,000 is worth $15,000 three years later. By what percent did it depreciate?
Show answer
($25,000 − $15,000) ÷ $25,000 = 40%.
Insurance is $150/month, gas is $120/month, and maintenance averages $60/month. On top of a $300 car payment, what does the car cost per month?
Show answer
$300 + $150 + $120 + $60 = $630 a month.
The dealer offers a 72-month loan so the payment fits your budget. What should you check first?
Show answer
The total interest and the out-the-door price. A low payment on a long loan often hides a higher price or rate.
Can you…
Sources and dates
- AAA: Your Driving Costs 2025 · as of 2025 study
- AAA: Your Driving Costs 2025 · as of 2025 study (full coverage)