Driving is an expensive task no matter where you live in the world. Especially in the USA, with our legendary winters. With these winters come rust, potholes, black ice, and skirmishes, as well as anything that is exposed to the sun and causes, wear and tear on vehicles. But of course, the weather is not the only thing that increases the level of damage to our cars and decreases their value.
Gasoline, maintenance, insurance, bad credit car loans and records must be taken into account in determining the actual cost of owning and using a car or truck of any type. People who regularly drive a car no longer have surprises. Cars and car loans cost money with every acceleration and braking. Some people have no issues dealing with these costs, while others have to put all their money together to make their payments. New cars, in particular, are dangerous for the finances of many people from the time of purchase to sale. Even used cars have all kinds of problems. That being said, for many people, driving is a necessary evil, they must have to make money. Again, all this money often ends up returning to their car. Our question is: How much can you afford a car? If you’re a regular driver and you’re considering buying, renting or financing a vehicle, you need to ask yourself this question before making a big decision.
What are your options?
For the argumentation exercise, suppose you do not own a car. Some people have the chance to inherit the kitty from a family member. Maybe they managed to find a good deal on Kijiji. For older and more used cars, drivers face general problems such as fuel, repairs / maintenance, and insurance. However, they will probably not have to worry about other issues, such as down payment, warranty expiration, monthly payments and interest on a new or slightly used vehicle. Buying a new or used somewhat vehicle is another thing in some respects. All these problems with new cars are things that most drivers are willing to ignore to move around. Thus, because of this desire for convenience, most of the time, these same will not rethink these problems until it becomes a financial problem.
When you earn enough income and drive a car of the year, this type of problem may seem far away. Only when you realize that you have no extra money as your bank account begins to suffer. So for all these reasons, you must be very sure that you need a car. Consider all of these options before starting to visit dealers. Is public transit a viable option? Can you walk or bike instead of driving? Why not buy a scooter or moped? Again, depending on where you live, public transit may not even be accessible, as in rural areas. Taxis and Uber rides accumulate quickly. So, if there is no bus or train in your municipality,
What type of car are you trying to have?
Imagine that you are thinking of buying a new car, or at least a used car, less than ten years old with less than 100,000 km. Research is essential for any major financial decision and the purchase of a car is no exception. You can and should ask yourself a lot of questions before jumping on the first vehicle that catches your eye. Here are some of these questions:
- What kind of car do you want? A car with a suitcase, a sedan, an SUV, or a van?
- What color will it be? Believe it or not, some colors may be more expensive than others.
- How much will you pay in essence for each of these choices?
- How easy and affordable will maintenance be for different makes and models?
- How are you going to pay for? Do you rent, finance or pay in cash?
- In case of financing, do the dealer or your bank offer a better rate?
- How much will your payment be?
- What will your payments look like? Monthly, weekly or biweekly?
- Will a warranty cover the car? If so, for how long and what will it cover?
- How will the cost of the vehicle affect your finances shortly?
Not everyone can afford a new Ford Mustang. So, as a simple example, we are going to use a car that is a little more reasonable and more fuel-efficient, like a Toyota Prius. The average price of a 2017 Prius Core is $ 29,404. We assume you can not get to the dealership with almost $ 30,000 in your pocket. We will, therefore, choose the financing by the dealer. In general terms, the minimum duration of available funding is 36 months (3 years). You can want to extend this payment period in 12-month increments (84 months being the maximum), but we will only use 36 months as an example. If you choose monthly payments, it means that you will pay $ 816.78 per month for 36 months. That does not include the GST, the QST, tire taxes, interest payments and all other expenses related to the car. Once again, the Prius is one of the most economical cars on the market. Imagine a van, SUV or sports car. For some, this price might not seem unreasonable at all. Be aware that instead of spending one year’s salary on a new car that you may not be able to buy back later, you could put almost $ 10,000 in your RRSP or similar account in those 36 months.
Depreciation of vehicles
Be aware that by the time you finish the payment period, you may end up paying a lot more than what the car is worth. Almost all cars and trucks are depreciating over time. Most cars lose about 9% of their value as soon as you leave the dealer’s parking lot, 19% by the end of the first year. It is not a problem if you plan to buy the car, drive with it and get rid of it after a few decades. However, if you want to sell it at any time, do not set your expectations too high, because it is likely that you will never reach what you have invested.
This does not mean that buying a car, and especially a new one is always the wrong choice. These are all questions that must be taken into account before embarking on tempting offers, regardless of your income. If you need a car and are worried about being unable to make payments, consider buying a used car instead until you buy something newer. It is better to drive a little auto and not have to worry about fundamental problems than to get your car, or to go bankrupt after several late payments.
The rule of 20/04/10
When it comes to financing (instead of buying or renting new or slightly used cars), some experts in the field recommend that drivers stick to the rule of 20/04/10. This is a fundamental system for processing the funding process:
The 20 :
Refers to the down payment you must pay on the total amount of the car you want to finance. It is suggested to pay a deposit of 20% or more. If you decide to put less than 20%, you will probably fall victim to the depreciation of the car and end up spending more than what the car is worth.
The 4 :
To see with the term of payment of the loan of the car, four years is the recommended threshold. Even if a three-year financing period is an even better choice, be aware that the more years you add to your payment period, the more you comply with your lender’s insurance rules and high rates.
The 10 :
This means that you should not spend more than 10% of your gross income on your car payments, which include the principal payment, interest and insurance charges. Depending on your financial situation and your life, spending more than 10% of your gross income could cause you to exhaust your paychecks very quickly. It’s money you could put elsewhere, like your TFSA or RRSP. You could even take a well-earned vacation or spend the rest of your income on essentials such as groceries, household goods and living expenses (rent, mortgage, etc.).
Reduce costs and save for the future
Once again, if you insist on owning a car, it might be better for your finances to buy a used car. Just make sure that you also consider all other unavoidable expenses related to the car before making your decision. Let’s face it: a car will make holes in your savings, whatever its make or model. Even when driving an old small car, if you want to keep it intact, you will need to be diligent and bring the car to the mechanic on a regular basis, taking into account parts and labor. For people who live near a transit system, you can try to use it occasionally, instead of making your car every time. This can also save you a decent amount of money in the long run.
All in all, everyone’s financial situation is different, especially for those of us who need a car to get to work, school or grocery store. There are cars of all shapes and sizes. Some are cheaper than others; some consume more gasoline. Whichever car or truck you are looking to buy or drive now, it is also essential to book money for the future. And when we say “the future,” we do not necessarily mean for your retirement. It is difficult to predict future events, whether they occur tomorrow or in several years. As a consumer, we tend to spend. You could save with your rent,
To conclude, we are not dissuading you from buying a car, and we are just trying to give you an idea of what your car could cost you in the next few years. Any decent car can be a crucial tool that you can use to progress in life, provided you work hard to take care of it. Always keep in mind that a car is a responsibility that could lead you to a better financial future, so take care of it and drive carefully.