Deals on wheels

How to choose a car-financing option that's right for you

Deanne Gage 6 June, 2014 | 6:00PM

The average Canadian's non-mortgage debt is expected to hit around $29,000, according to TransUnion. That number is mainly due to car loans. So it's no surprise that clients come to their advisors for feedback on what's the best way to handle their vehicle purchases.

"Buying a car is a major financial decision," says Aaron Keogh, president and financial advisor at Greendoor Financial Inc. in Windsor, Ont. "My clients will ask me whether they should finance, lease, buy new or used. They want to know how it will fit into their budget."

Keogh's first question is how long the client plans to keep the vehicle. If the answer is "until it dies," he says the best strategy can be to buy the vehicle outright in cash, if they have the funds readily available.

Even better is getting a reliable used vehicle since a new car loses a substantial amount of its value the minute it's driven off the lot, he adds.

Most middle-class people, however, don't have $20,000 or $30,000 just lying around for a car purchase, so their choices come down to financing or leasing the car.

Some may finance by putting the car on their line of credit but, for the most part, financial advisor Mark Landers would recommend monthly payments instead. "One of the good things with fixed payments are people are likely to make the payments," says Landers, who works at Toronto-based Northridge Financial Group. "With lines of credit, it's easy to say 'we'll just pay interest this month because we're going on vacation.'"

That said, in the case of disciplined clients, a line of credit would allow them more flexibility to pay off the loan faster. The interest rate may be lower on a line of credit than the rate for the purchase financing, especially when looking at a used car, he adds.

Aim to pay off the car within three to five years. Any more than that and you've purchased more car than you can afford, says Jason Heath, a fee-only advisor at Objective Financial Partners in Markham, Ont. A few years ago, the car companies announced new financing over 84 to 96 months (translation: eight or nine years!) in an effort to keep monthly payments low.

But in those cases, the vehicle often depreciates faster than the principal is repaid, says Keogh. Warranties can also run out before the car is paid off and once a car gets beyond five years, maintenance costs tend to increase. What Keogh sees is the potential of what he calls "upside down payments" where a person is ready for a new vehicle but still owes a considerable amount of money on his current car.

One big mistake people make is falling for 0% financing when it's simply a marketing gimmick, says Heath.

"You really need to look beneath the surface rather than just opting for a vehicle based on a hook like cheap financing rates," Heath says. "If a company is going to offer 0% financing on a vehicle, they've probably priced the vehicle slightly higher than they would if they were offering 3.99% financing," he explains. "So the rate of interest on financing is not really that important. It's what you'd pay for the vehicle compared to another vehicle.

When does leasing a car make sense? It could be a good choice for people who like to upgrade their cars every few years, says Keogh. Payments are low because you are leasing only a portion of the value of the vehicle, he adds, which is why there are kilometre restrictions.

Leasing can be attractive for business owners, as the payments can generally be claimed as expenses. Clients should check with their accountants to determine how much of the lease payment is deductible, according to their usage of the vehicle, says Keogh.

The main downside to leasing is that you're constantly in monthly payment mode. While that could be true for financing, some pay off their car and then continue to drive that same car for many more years and just pay maintenance costs.

If you exceed the kilometre restrictions when you trade the car in, you face fees. You can't modify the leased car in any way and there's a charge for too much wear and tear.

Before committing to any car purchase, Keogh advises clients to consider the other costs that go in tandem. "I always recommend that people contact their insurance company prior to making a purchase," he says. "They should understand the potential increase in rates, and get an idea of maintenance costs."

Even things like the type of fuel required can affect your bottom line over time.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.