Knowing What You Can Afford To Buy 

With many Toronto residents staying home and social distancing, purchasing a vehicle has become a popular trend during the pandemic. Car ownership is associated with freedom these days; a way for those unsure about public transit to avoid taking a bus, streetcar or subway, and for others to escape the city on weekends by visiting provincial parks or nature preserves.

If visions of a new-to-you vehicle are filling your thoughts these days, there are a few factors to consider before you make a purchase. It is important you let the numbers, not your emotions, drive your decision making.

When shopping for a vehicle it is crucial to consider and compare the total costs of different brands, makes and models, but also the impact the purchase will have on your overall household budget.

You need to not only take into account the down payment and ongoing car payments – regardless of whether you decide to buy or lease – but also the insurance, maintenance, fuel, interest, registration and tax costs associated with owning a vehicle. You should also consider the residual value of your choice, meaning what that car, SUV or truck will be worth in a few years when you want to sell it.

To keep yourself organized, set up a spreadsheet and input all of these costs so you can compare various vehicles you are considering purchasing.

The best advice is to keep the total operating costs of the vehicle, including payments, maintenance, insurance and gas or electricity to 10 per cent or less of your take-home pay. This benchmark will help to ensure you don’t purchase more than you can afford and will ensure you are not short-changing other aspects of your budget, such as putting money toward retirement or into an emergency fund.

If you do need to go over the 10 per cent mark, try everything in your power to stay below 12 per cent (so a modest flexing of the benchmark) of your take-home pay and trim back your household budget in other places to keep other costs down.

Leasing versus buying

“When doing the math at first, leasing looked more desirable based on the lower monthly payments,” said Colin Jaworski, who along with his partner David Geisler, bought a 2020 Volvo V60 Station Wagon  this March after feeling cooped up by the continued lockdown measures in Toronto.

“The deal breaker for us was that at the end of the leasing term you don’t own the car outright. While financing costs more up front, in the long run we were happy to own at the end of the financing term.”

This logic totally holds true, especially if you want to keep the vehicle for a while, but leasing can still make sense for the right person and their circumstances. Leasing can be the better option if you own a business, plan to change cars often, only need a vehicle temporarily or if the lease payments are significantly less than a financing payment, which means you could end up with more money than if you had bought the car outright and sold it at the end of the lease. Lease rates are also fairly attractive at the moment because of the low-interest rate environment.

If you are planning to lease be sure to keep within your mileage limits so you don’t incur penalties, negotiate the lease price the same way you would if you were buying the car, and don’t get yourself into a super long lease that’s beyond the vehicle’s warranty period (which is kind of one of the biggest reasons to lease in the first place). Last, if you’re considering owning the vehicle longer term (a.k.a. buying out the lease) research its residual value and compare that amount to what the dealership plans to charge you.

Used versus new

The benefit of buying a pre-owned vehicle is that someone else paid the steep initial depreciation costs. Unless you’re driving a specialty car, which does include certain high-end and electric vehicles, like a Tesla, a standard new vehicle will lose at least 30 to 40 per cent of its value within three years. A Tesla will also depreciate over the same period, but it will only be between 20 and 30 per cent over that time.

Besides the vehicle being previously driven, the disadvantage of a used vehicle is that there can be less attractive financing options, which means you could have to pay for a good chunk of the car upfront with cash, a bank loan or line of credit, or face a higher financing rate.

Buying new can be a good option. Besides benefiting from lower insurance costs, if you plan to drive the vehicle for a very long time (seven years or more), it can make sense to buy new because of lower interest rates on financing, high reliability, dealer incentives, better gas mileage and the fact that eventually you’ll pay it off and own it outright; giving you some of your money back when you eventually sell it.  You might even discover, after looking at all the costs,  that a new car might actually be cheaper than opting for a used one you’ll end up having to replacing sooner. Almost always, when owning, the longer you can drive it, the better.

Save as you drive

If you’re trying to save on the ongoing costs associated with owning a vehicle, consider bundling your home and auto insurance, keeping your car well maintained and signing up for a safe driving app. Insurance providers such as BelAir, Onlia, Intact and TD will give back approximately 25 per cent of your premium if you’re a safe driver use their mobile app.

10

The percentage of your take-home income that should go into all cost associated with your vehicle.

Lesley-Anne Scorgie is a personal finance author and columnist with the Star. Her company, MeVest, focuses on independent financial education.