How To Make Car Buying Part Of Your Financial Plan
Published on Money.ca, October 4, 2010
One of my favourite sayings is "It's not what you make but what you keep that counts". A car is the second biggest expenditure people make next to their mortgage. This month's article is devoted to making sound financial planning decisions about this depreciating asset to help you keep more money in your pocket long term.
Several years ago, we had hired a PR agency to help us get the word out about our company and the expertise we brought to the table. Fortunately, one of their writers had just recently leased a new vehicle and could relate. When we started talking about the financial part of his transaction, you could see a blank stare come across his face, his eyes seemed to go blank and he kept nodding in zombie-like agreement to everything I was saying. I could tell he really didn't understand a word. I could also tell from his paperwork that he had been taken to the cleaners.
The problem I discovered then was that this otherwise intelligent man, like many people, was not comfortable with complex matters of finance. More importantly, he hadn't probed deeper when doing the deal, possibly because he didn't know what questions to ask. It reminded me of my past escapades with timeshare salespeople in Mexico where we were overwhelmed with information and numbers and the pressure of doing the deal right there and then.
Ultimately, which car one buys and how they pay for it is a very personal decision - a function of their tastes, lifestyle and affordability. As their agent, my job is to ensure they fully understand the decisions they are about to make, no matter how in-depth the explanation needs to be. This philosophy has helped us grow through long lasting relationships with our customers and those they refer us to.
To that end, here are some tips about vehicle financing and leasing that will help you keep more money in your pocket:
- For many people, buying or leasing a car becomes an emotional decision instead of a financial one. Putting upfront effort into proper planning, which includes separating your needs from your wants and knowing your limits, will yield big rewards in the end and help you make, and stick to, more objective decisions.
- Leasing is much more expensive long term than buying. The monthly payments may be lower short term but they will continue forever. With a purchase, after the end of the term, the monthly payments become disposable income for you. Depending on interest rates, you may be better off financing for a longer term than leasing.
- Is the interest you would pay by getting a loan from your own bank less than the rebate the manufacturer is offering? A low interest rate is very cleverly marketed as free money but in fact you are funding the low interest rate out of your own pocket by foregoing a rebate if one is available. Run a spreadsheet to consider all the options over the entire term. We do this automatically for every new car client. Sometimes it makes sense to take the low interest rate and other times it doesn't.
- Buying a one or two year old vehicle will save you up to 30% of the price of a new one while still giving you a vehicle in good condition and plenty of warranty. Over a four year span, a vehicle depreciates roughly 60%, front loaded. This means that the most depreciation will happen in year one and two.
- It is never a good idea to get out of a lease early. If you like changing vehicles more often, then buying is definitely better than leasing. Otherwise, you'll pay pay lease transfer costs and a hefty incentive to someone to take over or break your lease.
- It is an even worse idea to trade a leased vehicle in with a dealer. Your remaining payments still have to be made but will simply be buried into the next deal. You will be double paying for a vehicle that you are no longer using.
- Buy a vehicle that has been involved in a minor accident and properly repaired by the insurance company. The price will be greatly reduced and it will still give you many years of reliable use. When you sell it down the road, the gap between an accident free car and yours will narrow dramatically so you won't really lose much on the resale but will save a lot on the purchase. Just make sure to have the vehicle independently inspected by a licensed mechanic to ensure there won't be future problems. Automall Network provides the inspection as part of our fee.
- Our clients save a great deal of money when we handle the negotiations. Tuck these savings away if possible, especially into your RRSP/401(K) where it can grow tax free. For example, starting at age 25, you will go through approximately 10 vehicles by age 65. Saving $2000 on each vehicle results in about $40/month on a 48 month term. With the power of compound interest (say even at 3% annually) and tax free growth, you will have accumulated the equivalent of earning $75,000 by age 65 in your retirement savings plan. Talk to your financial planner about making even higher ROI investments.