Infographic: Auto Financing 101
Before you purchase your next vehicle, whether it’s a reliable car to get you to work on time or a recreational vehicle to have fun on, check out our latest infographic. We broke down the vehicle buying process into 3 easy to understand and follow steps. This way you’ll know exactly what to do and what financing options are available to you and before you head to your local dealership.
There are many vehicle-related costs involved with any type of motor vehicle and all of them should be factored into your budget before you decide to buy one. If you’re a frequent driver, chances are that when you first got your license, someone in your family gave you the “a car is a responsibility” lecture. We hope you listened because trust us when we say that they were absolutely right, especially from a financial standpoint. At Loans Canada, we understand the hefty undertaking that is owning and operating your own vehicle. Therefore, we’re going to discuss a few of the more important vehicle-related expenses, as well as some main ways that Canadian drivers go about financing their vehicles. So, before you head to the nearest dealership, pump the brakes and read this.
Step 1: Determining Your Budget
For the sake of argument, let’s say that you haven’t purchased a vehicle yet. Or maybe you already own a beater and want to upgrade to something newer. Then again, you might just be looking to purchase a recreational vehicle, like an ATV or a camper to have fun with. Whatever the vehicle you’re trying to finance is, the first thing you should do, as with any large financial commitment, is to draw yourself up a reasonable budget. Within that budget, you should factor in both your regular day-to-day expenses and the ones that will come with your vehicle. Remember, every minute you drive that vehicle, you’ll be spending money. Even when the car is just sitting in your driveway, some way, somehow, it will eventually end up costing you. Here are a few things that should definitely be factored into your budget:
Your Monthly Income
Will your regular monthly income support this financial commitment? Motor vehicles range in all shapes, sizes, and costs. Some burn more fuel, some are prone to more mechanical problems. Whatever type of vehicle you want, be certain that you’re making enough to support both it and yourself after you’ve bought it. You don’t want to spend all your money on a new car and have nothing left for basic living costs.
Your Typical Monthly Expenses
Speaking of living costs, think about how much you spend on the basic necessities of your life. Do you live on your own? Do you rent an apartment or mortgage a house? How much do you spend a week on groceries? What about utilities, your phone, internet bill, and property taxes (if mortgaging)?
Moving out? Here’s the budget you need.
Your Monthly Debts
All your living expenses need to be paid for somehow. And, unless you’re planning on paying for everything in cash, which is possible but unlikely, then chances are you’ve got a few other bills to pay on the regular, namely your credit card bills. Other debts to consider might be a line of credit, mortgage, personal loans, student loans, and of course what could soon be your car loan payments. Even if you want that new vehicle badly, paying your other debts should take priority.
Your Financial Goals
It’s just as important to think about the future as it is to think about the present, which is one of the main principles to keep in mind when you’re learning to budget. Consider the things that you’re working towards, besides owning a vehicle that is. Do you want a house someday? Are you planning on getting married or having children? Then again, “the future” doesn’t necessarily mean the distant future. Your financial goals can be anything from your eventual retirement to a nice vacation. Whatever those goals are, it’s good to factor them in before buying any vehicle. It’s essential to set aside some of your earnings for your savings account and/or RRSP. This way, you’ll be able to afford a vehicle while still preparing yourself for your future.
For Loans Canada’s essential guide for saving, click here.
Consider the Costs of Owning a Vehicle
Once you’ve taken all your other living expenses into consideration, now comes the fun part, realizing just what your new chariot could cost you down the line. And when we’re talking about your vehicle-related expenses, we don’t just mean the initial price tag. Like we mentioned earlier, most common vehicles are going to cost you money almost every day. Even an ATV or snowmobile that you keep in your garage still requires regular maintenance. If you’re driving a motorcycle, you’ll need to pay for things like training courses, as well as a separate license and insurance policy, all of which can cost upwards of $1,000 by themselves. Other typical vehicle-related expenses include, but aren’t limited to:
- Insurance – Your age, vehicle type, make, model, even the color are all factors that will affect how much you’ll pay for insurance. For example, motorcycle drivers under the age of 25, who drive speed bikes are going to pay more for insurance than those who are over 25 and drive cruiser-models.
- Gas – Unless you’re buying an electric car, fuel is one of biggest expenses that comes with any vehicle. Even a hybrid will go through a tank of gas every now and again. Different types of vehicles also burn different types of gas and oil. For example, diesel fuel costs a few cents less than regular unleaded gas. But, if your vehicle runs best on supreme, you’ll pay more for it.
- Maintenance and repairs – Every vehicle, no matter what make, model, or how it’s reliability is being advertised, will start to need regular upkeep after a certain number of kilometers. For instance, most cars and trucks require a new timing belt at around 100,000 KM. This operation alone costs over $1,000 for parts and labour. Even if you know how to do your own repairs, you’ll still need to buy the parts yourself.
- Registration and Driver’s License – The costs of your vehicle’s registration and your driver’s license will vary according to what kind of vehicle you’re registering and what province or territory you live in. While they might not be over-the-top expensive at first, don’t forget that both your registration and driver’s license must be renewed every year.
- Taxes – There are a number of taxes that you’ll have to pay for when you’re a vehicle owner. For example, in British Columbia, if you buy a used car from a dealership, you’ll pay for GST (Federal Goods and Services Tax), as well as PST (Provincial Sales Tax) on vehicles that cost under $55,000. However, if you drive a car for work purposes, you might be able to get a tax deduction for certain expenses, such as your fuel.
- Depreciation – With the exception of some classic cars and restoration projects, every vehicle loses value over time. In fact, as many drivers will tell you, new cars lose up to 11% of their value the minute you drive them off the dealership lot. Some makes and models depreciate faster than others, so make sure to do a lot of research before you make your decision.
Want to learn how much car you can realistically afford? Take a look.
Step 2: Choosing Your Vehicle
After you’ve made yourself a decent budget, it’s time to start thinking about what kind of vehicle you want to purchase. Actually, you’ve probably been thinking about this the entire time you were coming up with your budget, but those prospects may have changed after you calculated what that vehicle could cost you in the years to come. That being said, it can be a lot of fun to look around a dealership and set your heart on the prettiest looking car on the showroom floor. However, you should put just as much consideration into choosing your vehicle as you did for budgeting for it.
Think about what kind of vehicle your budget will allow. There are several different types of vehicles that you can get from a traditional dealership, such as:
- Cars (sedans, hatchbacks, etc.)
- Sports Utility Vehicles
- Recreational Vehicles
Once you’ve made up your mind, you can think about which make and model you can afford. Some of the more notable questions you should ask yourself are:
- Do you think you can afford a budget-style, mid-range or luxury model?
- Do want the floor model or the custom package? Floor models are cheaper but come with fewer features.
- What color do you want? A car that’s red will actually cost $300-400 more than a typical floor model black. Pinstriping, metal-flake, matte finish, anybody features that don’t come standard will cost you extra.
- What kind of warranty does the car have? A frequent sales tactic by dealers will be to throw in a warranty for 1-3 years or up to a certain mileage. However, if you want an extended warranty, you’ll have to pay more for it. In fact, there are several different kinds of warranties, such as “bumper-to-bumper” (covers basic wear-and-tear/manufacturer defects) and “powertrain or drivetrain” (covers engine, transmission, and transaxle parts). Make sure you fully understand what’s covered in your warranty before you buy the car.
- Will it be automatic or manual transmission? When it comes to certain car companies, automatic models sometimes cost more than manuals.
- Is it your first or second car? Maybe you can trade in your old vehicle to knock a few dollars off the price of the new one.
- Will this vehicle be your main source of transport or is it just for fun and emergencies? Even if the vehicle is just sitting in your garage, it will still cost you money. In fact, if it sits for too long parts of the vehicle might actually rust and lock up.
Whatever your choice ends up being, remember not to just look at the initial asking price. Make sure to factor in all the other expenses to come before you sign any contracts.
Step 3: Decide Which Form of Financing You Want
Again, for the sake of this article, we’ll assume that you aren’t buying a junk-mobile from a private seller, nor will you be paying for your new vehicle all at once. True, some machines, recreational vehicles, in particular, are more affordable than others and don’t necessarily require any of the following forms of financing. However, for a more broad example, we’ll say that the car, truck or another type of vehicle you’re buying is a new or lightly used machine with little to no mileage on it. The majority of would-be vehicle owners who desire a machine of this caliber aren’t going to pay for the whole vehicle upfront. They’ll need to turn to one of these types of auto financing:
For drivers who have good credit, financing through a bank is one of the most efficient ways to get the vehicle they need. If your application is approved, the bank will grant you a loan to buy your vehicle, which you’ll pay back in regular installments. Be aware, however, that the car loan will be secured against the value of your vehicle, so if you don’t keep up with your monthly payments, your car could be taken from you to cover the bank’s loss. Different banks also offer different rates, so make sure to shop around before you apply for a loan through your current institution.
The majority of vehicle dealerships have an in-house financing option available to their customers. Many drivers decide on this form of financing, being that the financial requirements are somewhat less strict than those of a bank, meaning borrowers with lower incomes and credit scores will have an easier time getting approved. While a dealership’s interest rates are often higher than a bank’s, better deals on payment periods and other gratuities can sometimes be negotiated to make a sale.
Want to know how to avoid car loan debt? Look here.
Lines of Credit
Another financing option offered by banks and other traditional financial institutions are lines of credit. Similar to a personal loan, a line of credit can allow a customer to purchase the vehicle of their choice. They can then pay off their debt in increments, almost like a big credit card bill, until the bank is paid back in full. However, the interest rates for lines of credit are often more affordable than those of a typical credit card.
That brings us to our next choice for auto financing, using a credit card. While it is true that some credit cards come with very high-interest rates, they are a suitable option for consumers who want to pay off their balance as quickly as possible. Some credit cards also come with certain benefits, such as rewards points.
Home Equity Loans
While it’s considered a less conventional way of getting auto financing, borrowing against your home equity is another viable option. Essentially, homeowners are able to acquire loans using the money that they’ve already invested in their mortgage, otherwise known as their “home equity”. These loans allow homeowners who don’t qualify for other forms of credit to borrow against their home, all at a lower rate than other forms of financing. So, if you’re thinking about using your home equity to finance your new vehicle, do so with caution. Having a loan that’s secured against your home means that if you fail to make your car payments, your house could be foreclosed and sold as collateral.
To learn how to borrow using your home equity, read this.
Another alternative that many drivers use to get behind the wheel of a new car is to lease it. However, unlike other forms of financing, leasing a new vehicle does not mean that the driver will end up owning it. In fact, leasing is just another way to say “renting”. So, if you’re not interested in actually owning the vehicle, but instead wish to rent it for a few years, then give it back to the dealership or rent another model, leasing might be the way to go. Leasing can be beneficial because no down payment is required and most basic repairs and maintenance will be covered under the leasing policy. It’s also a popular choice for drivers who need a car for business purposes, such as private limousine drivers who transport clients for a living.
This type of auto financing, more often seen with used cars, works along the same lines as traditional leasing, in the sense that for a brief period of time, you would be paying a dealership rental fee to drive a car that you wouldn’t necessarily be able to afford right off the bat. However, where lease-to-own agreements differ from regular leases is that the payments are more frequent (weekly or bi-weekly instead of monthly). The payments you’re making will also be going towards the car itself, which you will own at the end of the leasing period. Unlike a lease, you’ll need to make a small down payment before the process can begin, with the possibility of another payment when the contract is over. When all your payments have been made, the car is yours. Just make sure that you’re getting the car from a legitimate dealer and that you check the history of the car before you buy it.
Which Auto Financing Option Works Best For You?
Determining which form of auto financing will work in your favor really depends on your own financial situation, just as it does with any other large financial commitment. If you still want your new vehicle, but can’t decide which auto financing will be the most beneficial, try going to your bank and seeking the help of a financial advisor. If you can’t afford a brand new car, you can also look into certified pre-owned vehicles. Just remember that every financing option has its advantages and disadvantages, so it’s very important to take some time to research all of them properly.