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An automobile is the second biggest purchase that most Americans make in our lives. As is the case with the biggest purchase most make – a home – there are many hidden costs that one should consider. So, if you are about to make a purchase, or even thinking you will soon, read on for some tips on the hidden costs to watch for.

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Finance Charges

Finance charges on a car purchase vary with a number of factors, such as the duration of the loan, the amount of down-payment, your creditworthiness, and whether you are buying a used or new car. All those factors have to be equivalent to compare car payments across different dealers, so be sure to take into account any differences in down-payment or duration. Also, interest rates are typically higher for used cars when compared to new cars. One way to have these costs be completely transparent is to arrange financing through your bank or credit union ahead of time, prior to visiting the dealer.

Sales Tax

Almost all states charge sales tax or something similar as a percentage of the purchase price of the car. Alaska, Montana, and New Hampshire do not, and Oregon gets an honorable mention with its 0.5% rate. Delaware gets a less honorable mention disguising its 4.25% tax as a document fee.

Depending on the state, there may be legitimate ways to reduce the sales tax due. For example, leasing may mean sales tax only on lease payments instead of on the full purchase price of the car. Or for another example, a trade-in may reduce sales tax to only the amount due on the difference in value between the cars. As a final example, private party used-car purchases in Arizona are exempt from sales tax. In any case, it will take some worthwhile research to determine the permitted ways to minimize sales tax liability given your purchase and location. Remember, the typical rate of between 2% and 8% is likely to add up to a significant amount.

Leasing Fees

It is only a slight exaggeration to say that one has to be a linguistic genius to fully understand leasing costs. However, the most common and biggest leasing costs can be explained easily once the terminology is understood.

The money factor is simply the financing interest rate divided by 2400. For example, a money factor of 0.0027 is an annual interest rate of 6.48%. Once you know this, you can easily understand what interest rate you are being charged given the money factor.

The cap cost reduction is the down-payment added with the value of your trade-in, if any. It reduces the total cost of your purchase by exactly that amount. Therefore, lease payments are calculated not on the purchase price, but on the difference between the purchase price and the cap cost reduction.

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Also, read the lease agreement carefully as there may be costly fees hidden in there. For example, there is often a charge for exceeding a predetermined mileage, there may be early termination fees, and even fees for minor items like mismatched tires.

If leasing, read the lease agreement carefully and pay close attention to not just the purchase price, but both the money factor and cap cost reduction to ensure that you are getting a fair deal.

If you’ve decided to lease a car, truck, or SUV, be sure to take a look at our lease deals page. There, we track all the incentives manufacturers are currently offering across the country.

Documentation Fee

It is very common for a dealer to charge $200 or more for documentation fees, which is simply them charging you for the administrative paperwork that goes along with the transaction. Look for this fee to ensure that it is not excessive.

Registration Fee

A registration fee is the documentation fee under another name. Read the purchase agreement to ensure that you are not being charged both fees and that the fee is reasonable.

Service Plans

Service plans are not usually hidden, but their true costs can be. In essence, a service plan is a prepayment of service costs for a specific duration. Generally, you will get a slightly better deal than you would have paying for the services individually. However, service plans are usually only worth it if you keep the car for the duration of the plan, and you would need to service the car at that dealer anyway. The service plan can, therefore, very easily turn into a hidden cost.

Destination and Delivery

A destination cost or a delivery cost is the cost of transporting the car to your dealer. Read the purchase agreement carefully to make sure that you are not being charged for both and that the charges are reasonable.

Extra Protection

Dealer supplied extra protection can be almost endless with items such as paint protection, rust protection, and even fabric protection. Consider carefully the costs of these extras and whether you truly need them.

Conclusion

Given the myriad of possible hidden costs in buying a car, we at U.S. News recommend reading and reviewing each document carefully and doing the negotiation over email so that there is a written record of promises and costs. With all that said, enjoy your purchase as there is nothing quite like the open road in a new car while the stereo belts out your favorite Bowie album.

More Shopping Tools From U.S. News & World Report

If you’ve found the information you need to make a smart buying decision, head over to our best lease deals and best car deals pages. There, you’ll find all the best incentives manufacturers are currently offering on their best, and your favorite, vehicles.

You can compare almost every car available by perusing our new car rankings.

For more advice on whether you should buy or lease a car, how to get out of an upside down car loan, or even just help on the car buying process, U.S. News should be your guide.