Finance: Rethinking Car Ownership
Longer term auto loans are a risk to Canada’s economy. That’s the finding of a recent Moody’s Investor Service report that says rising interest rates along with strong job growth is leading to more uninsured mortgages and longer term car loans. The report says these factors are putting a strain on the lending quality of Canadian banks.
Major banks are now offering auto loans as long as eight years. The problem is a car depreciates faster in the first few years. With longer term loans you may owe more money than what your car is worth. The risk is if interest rates rise, those fixed car payments may be difficult to make.
In the report analyst Jason Mercer writes, “Almost half of outstanding mortgages will have an interest rate reset within the year, which will increase the strain on households’ debt servicing capacity.”
If you’re in the market to buy a new or used car, there are many factors to consider before you make that purchase. Many condo owners that live in the core are car free, but many travelling longer distances might be looking to buy.
Real Cost of Owning and Operating a Vehicle
According to the Canadian Automobile Association (CAA) four in five Canadians under-estimate the cost of owning and operating a vehicle. Six in ten under-estimated the cost by $4,000 or more. The CAA says the yearly ownership costs for an average compact car are about $9,500. This includes the cost of the car, maintenance, gas and insurance.
If these costs work with your budget the other considerations are to lease or finance your purchase.
When financing a car payment you’re amortizing the cost of that car over the term. If you’re borrowing the entire cost of the car and staying on your payment schedule, you will pay off the car and own it outright at the end of the term. When you own the car entirely, after the warranty expires, you’re responsible for all of the maintenance and repairs. According to Consumer Reports magazine, an authority on consumer products and their value, “expenses can skyrocket when warranty and free-maintenance periods are over.”
When leasing a car you will hear the term residual value; this is how much the car is worth at the end of your term. The lease holder is responsible to make payments equal to the car’s ticket price, minus the residual value. Since cars tend to depreciate quickly in the first few years, you will be making the highest payments the car will ever warrant during that time. Also note, lease rates are often higher than traditional financing as well.
Lastly, when considering leasing vs financing, calculate how much you drive. Lease agreements often come with a yearly limit on kilometres you can drive. That’s not the case with financing.
The bottom line is car ownership is expensive. If you’re already worried about interest rates rising, the best advice would be steer clear of auto loans, especially those loans extended over more than five years.
Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.