Many Canadian consumers tend to overspend when creating a car budget. Recent trends show that people have grown increasingly comfortable with being in debt. Recent data shows that as of 2014, the debt-to-income ratio is $1.63 to $1.
For car loans, the average length is 72 months, and many dealerships have started offering 96-month (eight-year) loans. Such drawn-out loan periods have caused many car owners to trade in their vehicles before paying off their debts and instead roll them over to the next vehicle. This practice makes the loan worth much more than the actual car.
Car buyers who get themselves into these predicaments are simply fooling themselves if they think that they actually own their shiny new vehicles – because, in truth, it’s the bank that owns them. It’s an omission that can lead to serious financial troubles later on – troubles you don’t want.
If you acknowledge and prepare for the various costly aspects of the car-buying process, you will be able to avoid many of the following budget omissions:
Omission #1: Not Accounting for Tax and Insurance
Tax and insurance is easy to ignore but impossible to avoid.
While there is no road tax in Canada, consumers in certain provinces have to pay an initial provincial tax when buying their car. This is important to track, because taxes vary from province to province. If you purchase a vehicle in a province with a lower tax rate and return to your residential province, you’ll have to declare the cost difference through a self-assessment and pay it.
Every car driven in Canada needs to have appropriate insurance and, depending on the driver’s history, experience and other details, it can have a big or small impact on your car budget. At any given time, law enforcers may (and likely will) stop you to check your insurance information. If you don’t have it, you will be subjected to a fine in thousands of dollars. No exceptions.
Omission #2: Excluding the Cost of Options and Dealer Add-ons
Add-ons and optional features can raise the price of your vehicle significantly. There are plenty of expensive car features out there that are fitting, but not worth the extra price. However, if there are options and add-ons that you feel you cannot live without, it’s important to include it in your budget early on.
If you are shopping for a Toyota Prius for instance, you might focus on the base price of $26,305. But if you decide to add the available Technology package, then it will be another $8,000, putting your total price $34,390. The sooner you recognize the cost of upgrades, the better you can accommodate it.
Omission #3: Planning to Buy without a Down Payment
While it may feel like a rush to drive off the lot without having to put any money down, the decision to do so may come back to bite you. As soon as you leave with your new vehicle, the value of it will go down significantly. What this ultimately means is that you’ll owe more to the bank and dealership in the long run. If you want to trade in your vehicle a few years down the line, you might not get your money’s worth.
If you have a poor credit rating, don’t even consider getting a car for zero down payment. If you don’t know your credit score, then be sure to check it. Equifax is a relatively simple and inexpensive service that you can use for this very purpose. Generally speaking, your down payment should be about 20 per cent when making a purchase as big as a car or a house.
If you don’t make a down payment, you might get caught in an “upside-down” loan (also known as negative equity). An upside-down loan is a situation where you need to pay back the loan before you can actually sell a vehicle. In other words, you owe more than the asset is actually worth.
Omission #4: Thinking of the Price as Monthly Payments
Very few people are able to waltz into a dealership and pay for a vehicle with a cheque or cash. Dealers understand this and may often charge car buyers more through monthly payments.
Big interest rates, longer loan terms and various other payment reconfigurations may add percentages and time to your loan, which will add up over time. A few percentage points and an additional year may end up costing you thousands of dollars more than you expect.
Be wary when considering monthly payments.
Omission #5: Not Researching Incentives and Rebates
When buying a car, sales and discounts are not always marketed. If you want a better deal for a vehicle, you’ll have to do a bit of researching. Programs such as incentives and rebates are offered by manufacturers to dealerships to motivate sales. The ability to recognize and use this information will help you during the negotiation phase.
Keep an eye out for these three different types of rebates and incentives: cash rebates, low-interest financing and special leases. Consider rebates to be a coupon and incentives to be an advantage to financing, such as paying zero interest. You can check the latest incentives for any vehicle in our free dealer cost report.
Omission #6: Buying a Very Old Used Car
Although the price for a very old used car is significantly lower than that of a new one, the physical depreciation and outdated technology may end up sinking a hole in your budget. Most car owners do not want a fixer-upper; they want something reliable. The older the vehicle, the more maintenance it’s going to need. All repairs are expensive and time-consuming.
On top of that, buying an older vehicle will cause you to lose out on some of the latest technology. If you think that you’ll save money on fuel by buying a used car, think again. Big improvements have been made in this area and many others in the past five years.
In terms of investments, Canadians keep new vehicles for approximately 6 years before trading them in. Consider how long your prospective old used car has and whether the money you save initially is worth it.
Omission #7: Neglecting Depreciation
It’s hard to think of depreciation as you’re getting into your awesome new car. And there lies the folly of the whole car-buying process. In the first two years, a vehicle can lose 25 to 40 per cent of its initial value (and some depreciate even more). If you have created a budgeting strategy that involves selling your car after a certain amount of time, it might be worth reconsidering.
If you want a sobering car-buying experience, consider calculating your potential vehicle’s depreciation rate before paying for it and see how it compares to other vehicles in this regard. You can use a resource like CanadianBlackBook.com to help you with that. Doing so will allow you to understand how fast your potential vehicle will lose its value and come up with possible strategies that can minimize this problem.
