Get the vehicle you want and keep your finances on track
Along with rent and mortgage payments, the cost of owning a vehicle can dominate the average Canadian household’s budget. Depending on the price, how it’s paid for (financing, lease or cash) and its fuel consumption, owning a vehicle can cost hundreds of dollars each month – perhaps even more.
But in a country known for its wide-open spaces, many Canadians simply don’t have a choice but to own a vehicle. Not to mention Canadians’ obsession with driving and the important place of the automotive industry in Canada’s history. The car has been a key part of Canadian culture for at least a century and that’s unlikely to change.
Many Canadians need a car but don’t have thousands of dollars lying around to buy one. So, how can you buy a vehicle without blowing your budget and eating up money that could be used for other interests?
Determining how much car you can afford
For buying a new or slightly used vehicle, J.D. PowerOpens a new website in a new window recommends you use the 20/4/10 rule.
- 20 refers to a suggested down payment of 20% or more. Less than this and the vehicle will fall in value so that you’ll spend more on loan payment than the car is worth.
- 4 refers to the number of years you’ll pay your car loan. Longer terms will may the car unaffordable due to interest. A 3-year financing term is even better.
- 10 refers to spending no more than 10% of your net income on car payments including the principal, interest and insurance. For example, if your net annual income is $50,000, you could afford $5,000 a year in car payments or about $417 a month.
Managing your debt
Your overall debt load will affect your application for a car loan. Less debt could show loan providers you’re managing your debt and that you have enough income to afford car payments. The less debt you have, the more you’ll have left to buy your vehicle.
It's also important to understand that the larger your car payment, the less you may be able to borrow for other needs in the future.
Budgeting by paycheck may be one way to help you manage your debt.
Take your time
The most important tip for saving money on a car purchase is to take your time. Rather than rush out to the closest automotive dealer, do your research: go online and study the cars you think match your budget and fit your needs.
Typically, there are at least a half-dozen options for any vehicle, from compact cars to pick-up trucks and sport-utility vehicles. Find out which ones receive high safety and performance ratings from reliable automotive experts before looking at the cars available in your area. Some services, such as the AutoTrader app, will even show you how a car’s listed price compares to other, similar vehicles for sale in your region.
Decide if you should lease or finance
Ideally, you’ll have enough cash to buy the vehicle outright. However, safe and reliable vehicles can be expensive, and not everyone has access to large amounts of cash. If you don’t have the cash on hand to buy the vehicle you want, you’ll have to choose between financing or leasing.
With financing, you pay your vehicle off over time, with the goal of eventually owning it outright. The dealer selling the car should be able to work with you to secure a loan.
With leasing, the idea is that you’ll make monthly payments for a period of time – usually a few years – before giving the car back to the dealer or buying it outright. Because the end goal isn’t always owning the car, lease payments tend to be lower, though you may not have anything to show for it in the end. Keep in mind that leases often come with limits on what you can do to the car (such as improving its engine or other components) and how many kilometres you can put on it.
In either case, the key is to get the lowest interest rate possible, helping you reduce the amount of money spent on interest.
Remember taxes and fees
Dealers rarely include the cost of taxes and fees when advertising their cars. Together, these costs can add thousands to the price of the car. Just adding these fees to the total cost can significantly change what your monthly payments will look like.
Contact your insurance company
Paying down a car loan is just one part of owning a vehicle. Another significant expense comes through automotive insurance, which, depending on the vehicle and your driving history, could cost hundreds of dollars each month. Other factors will include your age, gender and where you live. Even your marital status could affect how much you pay for automotive insurance.
To prepare yourself for this cost, call your insurance company ahead of time to get a quote. Keep in mind that many insurance companies allow you to pay on a monthly, semi-annual or even annual basis.
Consider the cost of repairs
Owning a car often involves paying off a loan, making insurance payments and a third expense: keeping the car in good shape and safe to drive. It’s important to consider that some cars are far more expensive to maintain than others.
Typically, the closer you are to where the car and its parts are made, the cheaper it will be to maintain (though there may be exceptions to the rule).
Look into a warranty
If you decide to buy a car that’s more expensive to maintain, think about getting a warranty capable of covering the cost of repairs. If you’re buying a used car, you may be able to extend the current warranty or buy a new one through the dealer.
Warranties are a gamble of sorts. They make sense if you feel’ you’ll need to repair the car and that those repairs will be higher than the cost of the warranty. But having a warranty on a car, especially one that’s expensive to maintain, can help you avoid surprise repairs costing thousands of dollars.
Electric vehicles
Today, the electric car is becoming more available and more capable of traveling long distances before needing a battery recharge. It’s also worth noting that the federal and provincial governments may offer incentive plans that can take thousands of dollars off the cost of a new electric car, making vehicles that might have appeared out of your price range more affordable. And that’s not even considering your ability to avoid the cost of buying gas.
Keep in mind that government programs can change and don’t apply equally to every car. For example, rebates can be higher for more affordable cars than luxury electric models. Be sure to do your research and get all the details up front when considering an electric car.
Look at used vehicles
One of the best ways to significantly reduce the money you spend on a car is to buy used instead of new. That’s hardly a surprise. The trick is to buy a car when its value has dropped but its condition remains close to new.
In most cases this will mean buying a car that is one or two years old. At this point the car’s value will have dropped significantly – perhaps by up to one-third of its original price – while it remains in near-new condition. You may also be able to take over the vehicle’s original warranty at no cost, something that could save you thousands of dollars if an expensive repair becomes necessary.