Cars are a waste of money. You can be on track with your financial goals, but add a car payment to the mix and it could derail your short-term and retirement contributions for years. Maybe it’s because I’m relatively frugal, but I never understood the allure of driving expensive cars. I mean obviously they look nice and the premium options make you feel important but, let’s be honest, you probably just want to impress other people. It’s a status symbol. That car ain't going to appreciate and in fact, just driving it off the lot will immediately reduce its worth.
Case Study: 2017 Honda Accord LX (the base model)
Let's do a case study on what a new, relatively average, car will run you.
Let's say you decide to purchase a manual 2017 Honda Accord LX (the base model). For accuracy, I went on Honda's official website and plugged in the numbers to see how much it would cost with the current deals and interest rates. With sales and tax included, the price tag comes to $30,004.78. Not bad.
If you choose to finance the vehicle, Honda will currently give you $17.09 manufacturer’s rebate, and if you choose to lease the vehicle, Honda will give you a $33.96 rebate. Let’s look at both options.
You saved up and you are able to put down a $10,000 deposit. You decide that since the interest rate is only 0.99%, you are comfortable with a term of 60 months (a.k.a 5 years). With tax, you are looking at paying $324.78 per month.
Now let's introduce the other variable expenses.
Car insurance: If you are in Ontario the average is approximately $160/month.
Gas: This can completely range based on your use. Let's say that you typically send $100/month on gas.
Parking: If you are living in an apartment, condo or possibly even a semi-detached house, you will have to factor in how much a parking spot costs, whether it’s in your building or a street permit. When I had a car I paid approximately $80/month, although that is considered on the cheaper end in Toronto. Let's use $80/month.
Maintenance: Again, this will range based on a variety of factors. I generally set aside $150/month for this expense. While your car won’t necessarily break down every single month, you will need this money for oil changes, changing your winter tires, license plate sticker renewal, windshield wiper fluid, as well as any unexpected expenses.
In total, you are looking at $814.78/month just to own a new, relatively “affordable” car. Again, that number is dependent on your gas, parking situation and maintenance costs, but you get the idea.
If you are fortunate to split the costs with a partner, that would lower your monthly expense to $407.39.
Now let’s look at how much it would cost to lease the same car. You choose a 48 month (aka 4 years) period at 0.99% annual rate. You also choose the higher annual km allowance of 24,000 km.
Now, the maximum down payment you can put down on a leased car is 30% of the total price. You put down $7,491. With tax included, you put down $9,026.88. At the end of 48 months, you have the option to buyout the car for $11,357.40. Your monthly payment will be $160.56.
With the additional variable expenses (i.e. gas, parking, maintenance), your total monthly expense would be $650.56/month. If you had a partner to split the costs, you would need to pay $325.28/month.
Now you’re thinking, leasing is much more affordable! And if you look at it solely on how much you are paying per month, it is. But that’s because you technically don’t own the car. You’re renting it out from Honda. Aside from “regular wear and tear,” every small scratch or dent will be scrutinized when you return the car after 48 months and they will charge you.
What if one year in your lease you scratch your car against a cement pole while trying to park, but can’t afford to fix it? Too bad. That choice is no longer yours. You will have to fix that eventually. And if it was your car, perhaps a relatively inexpensive bottle of polish or rust protector may be satisfactory to you, but that may not be sufficient for Honda when you return the car.
When you lease a car, the car must be in excellent condition. You also can’t personally modify it in any way. You also can’t drive it over the mileage restriction (in our scenario that’s 24,000 km/year).
Lease payments are calculated based on the manufacturer’s estimate of the car’s initial price and the estimated value of the car when the lease expires. If you factor in what you’re paying monthly, on top of the additional fees at the start of the lease and potentially at the end of the lease, you’re not coming out a winner.
Finally, because you don’t own the car, you can’t sell it. Say that you just lose your job, and you really can no longer afford to have a car. You can’t just sell the car and be done with it. You’re stuck paying the monthly payments unless you can get someone to take over your contract.
I will let you decide on which one is more favourable.
Buying a Used Car Often Makes the Most Sense
Honestly, now that I sold my car, I have been looking at www.autotrader.ca for the best deals on used cars. While I’m not considering buying one for at least another year or two, it’s fun to look. Yes, I have weird hobbies.
With just a quick search, I found a 2014 manual Honda Accord LX for $15,995 with just under 56,000 km. Although it’s only 3 years old, it’s about half the price of the new manual Honda Accord LX I referenced earlier.
Although the $10,000 you had saved up wouldn’t cover the full cost of the car, if you were not in a hurry and could wait a little while longer, it is certainly doable to have enough to pay for that car in cash.
Alternatively, if you really needed that car quickly, you could put down a 50% deposit, opt for an open loan, and probably pay that loan off in a matter of a few months. You would incur some interest, but it would be nothing like the additional interest you would accrue while financing the new Honda Accord.
What happens after a few months of paying off that loan? You can do whatever you please with that car, and with hundreds of dollars back in your pocket.
You would still have to pay for all the other expenses, which was around $590/month, but $590 is much more manageable and you own your car. Again, that $590 is an estimate, which could be cheaper based on whether you don’t spend as much on gas, have cheaper insurance, or have access to free parking. While those expenses are variable, the monthly auto payments are fixed.
To conclude, a used car will probably suit your driving needs just fine. You will save so much money. Also, try to pay for your car in cash, if you can. You do not want to pay interest on money that you borrow from the bank to purchase a depreciating asset. Instead of using your money for car payments, use your money to invest in a "vehicle" that appreciates and earn you money in the future. I promise, the car that you drive doesn't define you.
Let me know if you agree or disagree. Good luck and happy shopping!