Hidden Costs of Buying a New Car

May 26, 2016

Getting a new set of wheels is fun and exciting, but it’s important to consider the hidden costs of buying a new car. Some fees are specifically designed to increase the dealer's profit margin, while others are a non-negotiable part of the buying process.

Dealer preparation and advertising fees can easily exceed $1,000, but these expenses are already factored into the MSRP. Make sure there no such charges before you sign the sale agreement. The same goes for special add-ons like paint sealant and fabric protectant, which aren't necessary on today's cars. On the other hand, purchasing extended warranty coverage could be a smart move if you intend to keep the car beyond the standard warranty period.

If you're buying an import, be aware that some features may have been added to the car at the port of departure, not the factory. If so, you'll likely encounter a "port prep" fee, which can run as high as $600 depending on the manufacturer. There may also be a charge for transportation from factory to port.

Whether you finance through the dealer or a bank, expect to pay a loan origination or processing fee. This a standard practice in the lending industry and the amount is usually modest. Nearly everyone also pays a "documentation" fee to the dealer for handling the license and registration paperwork. Yes, you might be able prepare and file the documents yourself, but the hassle isn't worth the savings in our view. The biggest hidden expense is usually state sales tax, which can add 2% to 7.25% to the sale price depending on where you live.

Also keep in mind that it costs more to insure a new car than an older model. If you're making a huge upgrade, say from a beater to a luxury car, your annual premium is bound to spike considerably. The same holds true if you're moving into a high-performance vehicle. Whatever the case, check with your insurance company before you buy and make sure you can afford the increase.