Thursday, December 29, 2016

Pay Cash and Save!

Canada’s auto finance market is worth $120Billion annually.  That means there are a lot of us that, for one reason or another, cannot afford to pay cash for a car purchase.  Cost of living being what it is, it can be quite difficult to save up $30,000+ required to buy a new car outright.  For a good late model used vehicle it can be the same story, with a total cost in excess of $20,000.  Not many of us have that kind of cake just lying around and if we did, we probably would find better things to invest it in other than a new car (or at least I hope we would). 

That puts many of us in a position where we need to borrow money to purchase a car and then pay that money back over a predetermined term.  Breaking up the cost this way over time can make a car purchase more affordable since you only pay a small percentage of the overall price on a monthly basis (or whatever your payment frequency is). 

There are some pitfalls to this though – the major one being negative equity.  Also known as being upside down or underwater, negative equity is when your car is worth less than the remaining balance of your loan.  If you have financed a new car in the last three to five years, chances are you owe more on the car than what you can expect to sell it for.  Cars depreciate fast, and unless you applied a hefty down payment to your purchase, you’re going to experience some negative equity.  And generally speaking, the longer the term of the loan (regardless of the interest rate), the more upside down on the vehicle you can expect to be.

This really isn’t too big a deal if you plan on keeping a car for a very long time, especially beyond the term of the loan.  By the time you go to sell the car (or scrap it), you won’t owe more than what it’s worth.  At the very least, you can break even.  However, if something comes up and you need to get rid of the car, it may be too cost prohibitive to make sense. 

For instance, when I went back to school I was unable to apply for a Government sponsored student loan (and was therefore ineligible for a number of bursaries and scholarships) because I was deemed to have too many assets that I could potentially sell to finance my education.  One of those “assets” was my car (another one was my house, but the thought of selling a house to become eligible for student debt is so ludicrous that I’m not even going to go into it here).  However, because I had only purchased the car a year ago, even if I had sold the vehicle for top dollar to the biggest sucker on the planet I still would have owed thousands to my lender.  And this was at a 0% APR.  Therefore, I calculated that even if I got the loan AND some of the bursaries I would have been eligible for because I was able to secure a loan, I likely wasn’t going to recoup the costs of selling the car – let alone have any money left over to apply towards school. 

Yeah, some asset that is.  Thanks, OSAP.        

So what’s my point?  Well, there is an alternative to going into debt for a new or late model used vehicle but it’s not for the faint of heart: buy an old car for cash. 

There are tons of decent vehicles out there that are perfectly serviceable and will get the job done for a wide range of driving needs.  Plus you can get them for less than the cost of a new sofa set. 

I’m referring to your late 1990s to early 2000s grandparent mobiles that can be picked up for a song and still have lots of life left in them.  They have names like Oldsmobile, Pontiac and Mercury are often big, well maintained and beige.  And, if you play your cards right, they will be the best financial decision you ever made. 

Generally speaking, the cost of ownership is very low on these vehicles.  Chances are you can buy it for less than $3000, your insurance costs will drop significantly and the parts will be cheap and plentiful.  Over the course of a couple of years, if you add up the costs of new car ownership vs Grandma’s beater ownership, you will likely find yourself ahead a few grand. 

What if the car breaks down?  So what?  Every car breaks eventually.  And let’s say you’ve driven your newer car out of warranty.   You’ll be on the hook for any repairs that car needs anyway, plus you may still have payments on top that.  You’ll be stuck in a situation where you have to pay potentially thousands of dollars because you’ll be so financially committed to the vehicle that you really have no other option.  In a worst case scenario with a cheap car – i.e. the repair is way more than what your car is worth – you can just sell the car on to the next person and pocket a few hundred dollars.  Best case scenario, you can get the parts cheap and do the work yourself.

What about maintenance costs?  All cars need tires, brakes, hoses, spark plugs, fluids, suspension components and filters to keep them running happy and safely.  Sure you’re older car will likely be at the stage in its life where it will be due for new examples of many of these components.  Granted, this will cost more money on top of what you already paid for the car.  It may even get you to that point where what you have into the car is more than what it is worth.  However, remember that your financed vehicle will need many of these components replaced at some point as well.  Will you still be dolling out regular payments when these maintenance items become due?  Probably.  Will you owe more on your car than what it’s worth AND have to pay more money to maintain it?  Likely. 

When you total it all up, would you rather be spending $1200 a year on maintaining and fixing a car you owe nothing on or paying $1200 a year on maintaining and fixing a car your spending thousands of dollars a year to repay?  What are you out at the end of the year?  What are you out after 5 years (or even as much as eight or nine years depending on the term of your loan)?  Even if you have to go through a couple old cars in the same time you would have paid for a new car, you will still be further ahead in terms of money saved.

There is a downside to this though.  You do need to have enough knowledge of the mechanical aspects of cars in order to be able to pick out the gems from the crud.  It also helps if you are mechanically inclined enough to do as much work yourself as possible.  This is time consuming and can be stressful if your car needs a repair and you need to be somewhere the next day.  Therefore, this strategy is admittedly not the best idea for folks who commute to work every day and need to have the most reliable transportation possible.  Statistically speaking, like any machine, new cars are generally more reliable than older cars. 

Also, if you absolutely need to have the latest tech and gadgets you may never be satisfied driving an older car.  Furthermore, newer cars are usually more fuel efficient and produce fewer emissions than older cars.  So if you’re environmentally inclined, you will probably have some ethical concerns about driving an older car – then again, maybe the fact that you’re reusing an older car makes sense on that front given the resources required to produce a new car?  Maybe you just like that new car smell?    

There may be many reasons why an older car doesn’t work for you.  At the end of the day, you need to make the right decision for yourself.  If you can swing it though, the financial rewards can considerable. 

Finally, here are some tips I’ve used/wish I had used when checking out an older used car (or any car for that matter):

1.       Low mileage isn’t always an indicator of low cost.  Lack of use can be just as bad as over use, especially for things like gaskets, electrical components and hoses.  I bought a low mileage car that been sitting for a while and had to put more money in repairs than what I paid for it within the first 10 months.  While this meant I got on good terms with the local mechanic, I really could have saved a ton of cash if I had just purchased something that had regular use and a little higher mileage.  Personally, I aim for something in the 5,000 – 10,000 km a year range (about 3k-6k miles).  Not over used and not neglected.  And food for thought – how many miles do you think a poorly maintained car will last for?  It’s a good bet that high mileage car in clean condition has been well loved and properly maintained. 

2.       Be thorough in your inspection.  Check the frame/sub frame, body panels, floors, trunk, doors and all seams for rust and rot.  These may be obvious holes or subtle paint differences.  Also, make sure the all of the body panels line up and have consistent gaps.  If these things don’t check out, it could be an indication that the car was in a collision at some point in its history.  While this isn’t necessarily the end of the world, you should be aware of it. 

3.       Check the brake and fuel lines.  Replacing these could be big bucks, so make sure they are in good shape. 

4.       Make sure the tires are in good condition/match.  Tires can be expensive to replace.  If the car is otherwise perfect, a new set of tires is not going to break the bank.  However, if there are other repairs required, the costs can add up.

5.       Check to see all of the features of the car work (heat, AC, cruise, lights, etc.). 

6.       If the car has a scan port, bring a scanner with you to see if there are any MIL codes or if the test cycle is incomplete (which would indicate a code has recently been cleared).  Again, depending on the code, not the end of the world, but all good things to know when buying. 

7.       Take the car for a drive.  Make sure it runs well, there are no weird noises or fun colours of smoke coming out of the tail pipe (or other areas).  Make sure the exhaust isn’t blowing out of a hole somewhere in the system (especially the catalytic converters… pipes and mufflers are cheap to replace, exhaust manifolds and cats are not).  Make sure the car shifts smoothly.  Make sure the brakes stop the car.  Make sure the steering wheel steers the car.  Keep an ear out for bumps and clunks in the suspension and differentials.   

8.       When driving the car do some hard acceleration and braking tests.  See if there are any problems with the engine bogging down, the transmission responding to throttle input, dead spots in the power band, etc.  Make sure the brakes don’t fade quickly, that the ABS works (if so equipped), peddle feel is good, etc. 

9.       Do some steering tests to make sure the suspension and steering components are in good order.  Go to an open parking lot or something and do some full lock turns both left and right.  Then do some figure eights.  Listen and feel for clunks, shudders and other anomalies.  This could indicate that some suspension components are worn or broken and need replacing.

10.   Research the car beforehand.  In the age of the internet, there’s no reason why you can’t know pretty much everything there is to know about almost any car.  Between online databases, YouTube videos, forums and consumer reviews, there is probably more information online about the car you’re interested in than you can ever read.  Pay particular attention to the car’s trouble spots, how to do common repairs/maintenance and the cost/availability of parts. 


While this isn’t an exhaustive list it will certainly give you an idea of what to look for.  And if at all possible, bring the car to a trusted mechanic to give it the once over.  They’ll be able to effectively advise you on the car’s overall condition, and likely for less than $100 (or the cost of a tow).  Good piece of mind, I say. 


To sum up:

1.       New and late model used car loans can be financially debilitating.

2.       Paying cash for an older car in good condition can save you thousands of dollars every year. 

3.       Do what makes sense for your situation.

4.       Inspect and research any potential vehicle purchase. 



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