Financial Advice on Buying and Owning a Car

October 2024

1. Buying a used car, particularly one that is only a few years old, will save you thousands of dollars – you are not paying for the rapid depreciation in the first year(s).  The new car smell is not that valuable.
2. Keep the car for a long time – until its reliability no longer meets your needs. The cost of repairs is a lot less than the cost of a new car, including the interest on a loan (or lost interest on a bank account to buy the car). Depreciation on a new $15,000 car at 30% per year is $4,500, and, assuming an interest rate of 2.5%, you have also lost interest of $375 (plus higher insurance costs for the new car). That money will pay for a lot of repairs.
3. Buy a practical car (or truck). Spending $20,000 on a new vehicle every 10 years from age 20 to age 70 costs $120,000 (before inflation). Spending $50,000 every 10 years on a more luxurious car or an extended cab truck you do not need will use up $300,000. Guess which person can retire earlier and spend more time in vacation resorts because they saved and invested the $180,000 difference? Of course, buying a new vehicle every 5 years makes this difference even greater. Be smart – do not try to keep up with the  lifestyle of your friends and neighbours.
4. If you tell the dealer you are not trading in your existing car, and then negotiate your final price on the new vehicle (without any financing deals), you will know the true cost of the vehicle.  Then, if you change your mind and offer your existing car in trade, you will find out how much your it is really worth.  Then you can decide to take the trade-in price, or to sell it on your own to make a few extra dollars (or to donate it to charity – some charities accept used cars and offer donation receipts.  See Charities that Accept a Vehicle Donation web site).  Dealers often inflate the price of your trade-in and reduce the discount on the new car price  if they know in advance what you plan to do.  Your net cost of the deal may be the same, unless you decide to sell your existing car on your own at a higher price to make some extra cash.
5. Buying is usually better than leasing. If you are financial strapped, monthly leasing costs will be lower than loan payments – but remember, you never own anything. The leasing payments go forever, while the loan payment will stop, and then you have a car you can sell or trade-in when you are ready. There are a number of reasons that dealer like leasing – you will likely be back to them for servicing and to return the car.  This gives them service revenue and also a used car to sell. Of course, they also have the first opportunity to sell or lease you another car.  Perhaps their markup on leasing is also better than selling? Sometimes great special offers do arise – just investigate to be sure.
6. Consider low or zero interest loans carefully. If the $20,000 car you buy with zero percent financing over four years would only cost you $18,000 if you paid cash, you are actually paying 5.25% interest. The discount of $2,000 you are surrendering is the same as paying interest – it is not really a free loan.
7. Rust proofing your vehicle annually will do wonders for making a car last in Canadian winters.  By the way, most manufacturer warranties cover repair of rust that perforates your car within six or seven years (i.e. rust holes, not surface rust).  Therefore, if you only plan to keep your vehicle for less than six years, do you still want rust protection to protect against surface rust on the underbody?  However, see #2 above again.
8. Extended warranties are usually a waste of money. I like to ask the car salesperson to show me a better car when they recommend the extended warranty.  Why do they think I need an extended warranty – he or she would not make such a recommendation unless they expect a breakdown more than 50% of the time?  It is also fun to do this and watch them try to save the sale because they have effectively told you that the car is not reliable in the long run.  Surprisingly, many people buy the warranty even though they plan to replace the vehicle before the warranty becomes effective.  You should always have some emergency money in a savings account for such unexpected expenses (car breakdown, illness, fire, etc.).
9. Invest in a set of spare rims and snow tires (or ice tires) – this is Canada, eh! Speaking from experience with ice tires, they are so much better than all season radials.  I use ice tires because I try not to drive in snow and want extra traction after the storm when when it is icy or in the mornings and evenings when black ice forms.  Also, having extra rims saves the cost of installation and balancing every year. (Rims may be available from a salvage yard at a lower price than buying new). Remember – the only thing connecting you to the highway and your safe transportation are your tires.
10. Find a good, reliable, and trustworthy mechanic. Get a referral from your friends, neighbours and colleagues. I have such a person, and know that I am paying for what I need.  Things get fixed instead of replaced; tune-ups are only done when needed; and the car is kept in safe and reliable condition. He tells me when I need to go back to the dealer for certain repairs. I have nothing against dealers (my dealer also does good work), but I get the service I need from my local mechanic and do not get checkups, services, etc. just “because they are recommended.”
11. Car insurance can be expensive. Carry enough liability insurance – I recommend a minimum of $5 million. Look carefully at the cost of collision and comprehensive insurance. Consider higher deductibles to reduce premiums.  As your car ages and reduces in value, consider whether the cost of collision and comprehensive insurance is worth the price (get advice from your agent). If you rent cars, check with your own insurance agent to see if you need to purchase the expensive rental car insurance for liability and collision – it may be included in your existing policy or available at a very low cost. If you are relying on your “built-in” credit card coverage, read that policy carefully to avoid surprises – like the need to pay for the repairs up front on your own.  Here is an eye opener that may save you thousands of dollars – ask your agent how much the cost of your insurance will increase if you (or your child) get caught using a cell phone, or driving high or drunk. Then act intelligently.
12. Do you need road hazard insurance for emergency breakdowns, vehicle lockouts, etc.? This is a personal preference, but it may be beneficial for certain individuals who would like the security of knowing help is only a phone call away. Don’t just accept the offer that comes from the manufacturer with some new cars – it is usually very expensive. Shop for the right “auto club” and the appropriate cost to obtain the features you want. CAA, for example, comes with a lot of add-ons that are useful for frequent travellers, such as hotel, car rental and restaurant discounts, but those features may not be worth the cost for other people.
13. Take a defensive driving course, if you never had such training. If you are older, perhaps consider a refresher driving course. Nothing is more important than saving a life or preventing a lifetime disability. My father insisted our entire family take such a course when it was offered in our rural area many years ago. I am sure it has prevented me from being involved in many accidents because of knowing what to watch for and how to drive defensively.
14. When buying a car, or anything, buy what you need, and what you can afford.  Buy the extra “wants” only if you can pay without borrowing.  Always ask questions and get direct answers about all of your concerns – if the sales rep is dodging your answers like a politician, move on to a more trustworthy place to do business.  Sign nothing without taking the time to read the documents (often a long time, so ask for time or even ask to take them home to review).  If buying a used car privately, or without a warranty, ask to have it checked by your own mechanic before you close the deal.  As a young person, I once bought a used car from a dealer and needed to replace the brakes within a month or two, costing me money I did not have at that age.  When pushed to make a decision and you do not feel comfortable, your answer should almost always be to keep your status “as is” until you have more time (unless, obviously, some kind of harm is threatened).  I think this is advice for more than just cars.

Safe driving.  Spend wisely.  Save for tomorrow.

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Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum