This past fall, my mom decided to sell her 2006 Honda Pilot and upgrade to a new Pilot. My wife and I had been getting by with just our van for a few months, but we were ready to have a second car again.
So: Rather than go car shopping, we decided to buy my mom’s used Pilot. It had relatively low miles and was still in good condition. Plus, my mom was willing to give us a good price.
I called up USAA because they offer really good rates on car loans. I was already pre-approved, so the car loan was processed quickly. Of course, I had to decide how much of the car I wanted to finance, as well as if I wanted extra to cover the sales tax.
I casually decided to add an extra $500 onto the loan amount to cover the tax I expected I would have to pay. What I didn’t count on was how high the sales tax would be.
(Just a side note, for those purchasing brand new cars, the sales tax is usually deductible. Keep that in mind when it comes time to file taxes as it could save you a bundle. However, tax implications can vary state to state, so check online or with a professional to see what you do and do not qualify for.)
When I went to the DMV to pay the taxes and get my license plates, I discovered that the sales tax was nearly three times what I had budgeted! Talk about a shocker.
For the record, I live in Parker, Colorado, which has a sales tax rate of 8.1%. A used car purchase of $17,500 generates a tax of $1,417.50. Yikes!
In hindsight, I should have listened to that little voice in the back of my head that said, “Ryan, you should probably check the sales tax rate to see how much it’s going to cost you.” If I had done that in advance, it might have changed my decision to buy the car and/or changed the amount of the loan I got.
Unfortunately, I didn’t do this. End result: I had to pay for a portion of the taxes with a credit card just to get my plates. (This is one of the “two steps back” I alluded to in Getting Out of Debt Not Always Straightforward.)
Either way, if you are buying a used car and financing it through a bank or other lending institution, I strongly recommend you find out what your sales tax rate is first. Depending on your city, you may owe a much bigger chunk of money than you expected.
And if you’re thinking of buying a used car and also planning to move in the near future, you might consider two things:
- Move to a place that has a lower sales tax rate.
- Postpone your car purchase until after you have moved.