Whether it’s your first or your 5th, purchasing a car almost always involves the same financial questions. Will I lease it, finance it or (the less common one) buy it out with cash? Some people sway back and forth between leasing and financing and others prefer to stick to one method only. What is the financial difference between the three methods? What should I take into consideration before making the decision? How do I know what’s best for me?
Naturally, everyone of us is unique in terms of our financial status, goals, and interests so there is no cookie cutter rule to financing a car. The following should definitely be considered before plunging into the sea of dealerships, salespeople and purchase & sale contracts.
Your Goals vs. Your Car
Most people forget the future goals part, and budget their monthly car expenses to their current income alone. If after all expenses, you have $1000 a month left over, it doesn’t necessarily mean you should spend the entire $1000 on the car. Think about your major goals and potential future expenses. Are you currently renting and would like to purchase a property? Will you be attending college or university or maybe planning a trip of your dreams? Are you planning to get married or have a child? Everyone has a goal they’re working towards and this goal should be calculated into your monthly car budget.
If your goal is to invest into a property, then maybe it’s better to downgrade to a cheaper car to reach your goal faster? Prioritize your goals based on how quickly you want to achieve them.
It’s a popular debate, deciding between leasing or financing can be tricky, below are the pros and cons of both options.
- Hassle free, if you’re not happy with the car you can simply give it back to the dealership at the end of the lease term
- Affordable, depending on the make of the car, some leases run from $100 a month
- Brand new, enjoy driving a brand new car and save on costly repairs
- Comes with warranty from the dealership
- The car is not actually yours, it’s the dealership’s, therefore all your lease payments are mostly just “rent” payments
- When returning the car to the dealership, there may be penalties for lack of maintenance or damage
- Once the lease is signed, you’re stuck for the lease term, unless there’s an option to transfer it in another name
- The lease payment becomes a liability and shows up in your future credit applications, i.e. mortgage application, and therefore may lower your chances for approval.
- Own a car sooner, your monthly payments are getting you closer and closer to actually owning the car
- Since the ownership is in your name, you have the choice of selling the car at any time (as long as the loan is paid out first)
- The car’s value will diminish, however the loan amount and interest rate will stay the same, therefore you may be overpaying for the car
- Car loan interest rates are usually high, dealerships can usually provide a lower interest rate, but offer a higher price for the car (interest cost built into the price)
- Financing a used car may come with extra costs later on, such as repairs and extra maintenance
- Once the financing agreement is signed, you’re in the deal for the term of the loan
- The loan payment becomes a liability and shows up in your future credit applications, i.e. mortgage application, and therefore may lower your chances for approval.
Buying With Cash – My Personal Experience
As difficult as it may seem, buying a vehicle with cash is possible with a little research and assistance from either knowledgable friends, you family mechanic and, of course, the internet. There are a few sites that offer affordable cars for less. Here’s my personal experience with buying a used car from an online classifieds, Kijiji.
We spent the whole weekend looking for a car, probably saw between 4-5 cars in two days. Our goal is to purchase a house within one year therefore, financing or leasing a brand new car was not in the plan. Of course, we wanted a car that can survive a Canadian winter, and not whine too much about its age. Expectations were low, and so was our budget. The car had to be a van, so we could potentially use it as a moving truck for various items, since we were renovating the basement at the time.
The first van was $1200, a 2004 Dodge Grand Caravan, “mint” condition (by the way, all advertised cars are apparently “mint” these days), no repairs needed.
The second was $500, 2004 Dodge Grand Caravan, rough shape, breaks needed to be changed, too much work and money was to be invested.
We saw a few more, within the $1200 range, and ended up settling for a $700, 2005 Chevy Uplander with a set of back winter tires! The car was posted for $750. It was in great running condition, only a wheel bearing needed to be replaced (very minor repair).
Of course it’s not a dream car, however we’ve kept our goal of purchasing a house in mind, therefore we had to compromise one item (car) for another (house). Eventually, once this goal is reached, there will be a car upgrade.
Regardless of the financing method, calculating your future goal expenses into the car budget, will not only help attain the goal quicker but will help sustain motivation and desire to achieve more.