Buying a new or used car, or RV is a big financial decision. Having a set plan before you shop for a vehicle can protect you from taking on more debt than you can afford.
Setting a budget
Initial questions to consider:
- What type of vehicle will best meet my needs?
- Is it better for me to buy or lease?
- What should I look for when I’m buying a vehicle?
- If I change my mind on my newly purchased vehicle — can I return it?
- How much will insurance cost? The type of car you buy could affect your insurance premium, so you may want to get insurance quotes in advance.
Define buying boundaries:
- Establish non-negotiable requirements e.g., passenger capacity; power; fuel economy etc.
- Set your maximum price that includes all costs associated with the purchase will help keep you on budget. Try this calculator to help set an affordable budget for yourself.
- If you are considering a lease, keep in mind the annual kilometre allowance and the charges that apply for exceeding the allowance.
- Decide on the make, model, year, horsepower, gas mileage, and options to suit your type of driving. For example, a small compact car may be easiest to park and manoeuvre, if you do mostly city driving. If you spend much of your time on the highway, gas mileage and horsepower are higher priorities.
- Decide to accept or decline offers to purchase aftermarket options, protection packages, extended warranties, life insurance and security etching.
- Take the time to consider what the warranty will cover for your specific vehicle, if your purchase includes a warranty.
Buying on credit:
Most consumers can’t pay cash for a vehicle so they need to find financing. Shop for credit just as you would shop for the vehicle you are buying. Here are some financing tips:
- Remember that not all places that offer financing charge the same interest rates. Check out financing options with various financial institutions and the seller.
- Do not take on more debt than you can comfortably afford; borrow the smallest amount that you need. Service Alberta has resources to determine how much debt you can afford.
- The Financial Consumer Agency of Canada is another resource. The money and finances page has information on creating a budget, planning your finances at different life stages and how to protect yourself from frauds and scams.
- This Vehicle Purchase Worksheet is available for you to fill out when shopping for a vehicle.
- Alberta’s Consumer Protection Act (formally the Fair Trading Act) requires lenders to disclose specific information about the terms and conditions of a loan including:
- The complete description of the vehicle;
- the cash selling price;
- the amount of the down payment or trade-in allowance;
- a breakdown of all costs, fees and other charges;
- the credit charge, written out in dollars;
- the annual percentage rate of interest you’ll pay;
- the amount of each payment, the number of payments and the dates they are due; and
- the additional charges you will have to pay if you fall behind in your payments.
Focus on the total price first—consider the monthly payment after you know the total cost of your purchase:
A low monthly payment may seem more affordable, but you can get into financial trouble if you do not understand the possible implications of a high debt load, or negative equity.
Car loans can creep into the 96 month (or 8 year) territory. Meanwhile, the costs of repairs will increase and the trade in value will depreciate as the vehicle gets older. If you decide to trade in your vehicle before the end of your loan, the debt from your previous purchase will carry over to your new vehicle. In some cases the value of your trade in can be substantially less than what is still owing on the balance of the loan. If you continue this cycle you may find yourself in the position of paying higher interest rates or being refused financing due to a high debt load.
A longer term loan as opposed to a shorter term loan may allow access to a more expensive vehicle than higher payments would allow, but consider whether the total price of the vehicle is truly affordable. Decide the total amount that you are willing and able to spend over the long term before you shop, including all the extras, like the cost of regular maintenance and insurance.