A car may cost $300 a month to finance. That does not mean it costs $300 a month to own. You still need to pay for fuel, insurance, repairs and other bills. The car will also usually lose value while you own it.
That does not make buying a car a bad decision. You may need one to get to work, take children to school or visit family. A car can be worth having even if you later sell it for much less. The useful question is how much you will pay for that convenience, and whether you can afford the full cost.
Start with a year of costs
Before buying, write down what the car is likely to cost over a whole year. Include insurance, fuel or charging, maintenance, repairs, parking, registration and any local taxes. Add interest and fees if you are borrowing to buy it.
Use quotes for the car you want and the driving you expect to do. Another driver’s costs may tell you very little. Your insurance history, commute and parking arrangements can all change the bill. An electric car’s charging costs will also depend on where you can charge it.
Some costs will be uncertain. Put down a reasonable range instead of choosing the lowest possible figure. A budget that works only if nothing needs repairing leaves little room for ordinary car ownership.
Buying a car in the Netherlands: where tax fits in
If you live in the Netherlands, separate the taxes included in the purchase from those you will pay while owning the car. A new car’s consumer price normally includes VAT and any BPM due. BPM is a Dutch registration tax. The seller usually handles it, so do not add it again to the advertised total price.
Buying an ordinary used car that is already registered in the Netherlands does not normally create a separate new BPM bill. Importing one yourself is different. A used car from abroad may still require a BPM return and payment. A lower foreign asking price is only a starting point. Add any Dutch tax, transport and registration costs before comparing offers.
You also need to budget for motorrijtuigenbelasting, usually shortened to MRB. This recurring vehicle tax depends on factors such as weight, fuel type and your province. It does not simply follow the number of kilometres you drive. Check the amount for the actual car you are considering.
Petrol and diesel prices already include excise duty and VAT. When your budget uses the amount paid at the pump, those taxes are included. Keep the calculation consistent: purchase taxes belong in the purchase price, MRB is a separate running cost, and fuel taxes are already part of your fuel spending. Other countries have different taxes and registration rules.
Losing value is a cost too
Depreciation means the value a car loses over time. You do not receive a monthly bill for it, but you see the effect when you sell.
Suppose you buy a used car for $24,000 and sell it five years later for $14,000. You have lost $10,000 of its value. Spread over five years, that is $2,000 a year, or about $167 a month.
Now suppose insurance, fuel, registration, maintenance and parking cost another $4,600 a year. Including depreciation, the annual cost is $6,600: an average of $550 a month. This example assumes you paid cash. It excludes loan interest and any earnings you gave up by spending your savings.
These are made-up figures to explain the calculation, not expected costs for a particular car or country. The resale price is uncertain, and a car does not lose exactly the same amount each year.
The example also shows why a car still costs money after its loan is paid off. Insurance, repairs and loss of value continue. Keeping it may still be a good choice; paying off the loan simply does not make ownership free.
Do not count the purchase twice
There are two useful ways to look at affordability. Your monthly budget shows whether you can pay the bills when they arrive. A total-cost calculation shows what the car costs over the years you own it.
If you borrow, your monthly budget must include the whole loan payment. But when calculating total ownership costs, take care with the part that repays the amount borrowed.
You have already counted the purchase price minus the resale price as depreciation. Adding all the loan repayments on top would count the purchase twice. Loan interest and fees are extra costs. Repaying the amount borrowed reduces your debt.
Use the same number of years and the same mileage when comparing buying with cash, borrowing and leasing. Include any final payment and, where relevant, the car’s value at the end. Then check separately that you can afford each month’s payments.
A smaller payment can mean a more expensive loan
A longer loan spreads the payments over more months. That can make each payment smaller while increasing the total interest you pay. It can also leave you owing more than the car is worth for longer.
That matters if you need to sell early. You might change jobs, move home or find that you no longer need the car. If the sale price will not cover the remaining loan, you need extra money to pay off the difference.
Compare the amount borrowed, interest rate, fees, length of the loan and any final payment. Ask how much you would still owe after one, two or three years. The lowest monthly payment is only one part of the offer.
A lease needs a different check. Read the mileage limit, early exit charges and rules about the car’s condition. Find out which costs are included. A contract that suits your current commute may become expensive if your workplace moves.
Decide what reliability is worth to you
A used car may cost less to buy but need more repairs. A newer car may offer a warranty and fewer worries, at a higher price. Age alone cannot tell you which will be cheaper overall.
Consider two people on the same income. One works from home and can manage without a car for a few days. The other drives to early shifts and loses pay if the car breaks down. The second person has a stronger reason to pay for reliability.
For a used car, check its condition and service history. For a newer one, check what the warranty covers and how long it lasts. Paying more for less worry can be reasonable. Be clear about what the extra money buys.
Leave money for the first repair
Paying cash avoids loan interest, but using all your savings creates another problem. You still need money for unexpected bills after buying the car. Selling it to cover rent or a medical bill may take time and could make getting to work harder.
My guide to how much to keep in an emergency fund explains how to plan for those risks. Known servicing costs and a future replacement need separate savings too.
An annual repair budget is not enough if the money will only be saved gradually. A large bill could arrive in the first month. Before buying, check what you could pay immediately.
Try a simple test: insurance is due, the car needs work and you get fewer paid hours that month. Could you manage without expensive borrowing? If the answer is no, a lower purchase budget may leave you better protected.
Compare realistic ways to get around
To decide whether you need a car, compare ownership with an alternative you could actually use. That might combine public transport, cycling, taxis and occasional rentals. Include the awkward journeys, such as late shifts or visits somewhere with poor transport links.
If you already own a car, deciding how to make tomorrow’s trip is a different question. Some costs, such as insurance, continue even if you take the train. Comparing a train ticket with fuel alone may help with that one journey. It does not show whether owning a car all year is cheaper.
Give a second household car its own calculation. How often are both cars needed at once? A few taxi rides may cost less than another year of insurance, repairs and depreciation. In other households, two cars may be worth the expense.
Choose the upgrades that matter
You are allowed to spend money on comfort and enjoyment. A better car can be a welcome use of a pay rise. But decide what would improve your daily life before a lender tells you the maximum you can borrow.
Think about the features you will use, the costs you will take on and the amount you still want to save. This is one way to keep lifestyle inflation from using up every increase in income.
The right car is one that meets your needs and leaves enough money for the rest of your life. Its full cost matters more than a monthly payment that looks attractive on the showroom floor.