Buying a car can be exciting – sometimes too exciting.
With all the distractions and offers that the salesperson throws at you, it can be easy to lose track of the very basics of the transaction.
You have so many options – buying vs leasing vs financing, new vs used, trading in your old car or trying to sell it online…And each of these means a lot of money is on the line.
So before you go in and let a salesperson talk you into something that you don't really know much about (yet!), do your research ahead of time.
There are 3 huge decisions you'll have to make before you even start thinking about what kind of car you want:
- Buying your car vs leasing vs financing
- The pros and cons
- How buying a car works
- How leasing a car works
- Cost comparison
- Getting a new vs used car
- What is depreciating value?
- Pros and cons of buying used and new cars
- Getting the most value out of a new car
- Getting the most value out of a used car
- Trading in your car vs selling it privately
- The pros and cons of trading in and selling privately
- How to get the most value for your trade in
- Selling your car online
Buying a car vs leasing vs financing
When I was looking for a car a few months ago, I was surprised at how pushy some of the dealers were about leasing, even if I made it clear I wanted to own my car.
Toyota was especially adamant about it – the salesman told me more than 80% of people who leave with a car are leasing it. I'm not sure if this is a real statistic, but his insistence on leasing made me think that maybe there's something a bit fishy about it…
The pros and cons of leasing vs buying
So here are some pros and cons of leasing a car vs buying it (either through finance or cash).
Pros of leasing a car
- You're always driving a recent model car.
- You can upgrade your car each time your lease is up.
- You can usually afford a higher-price car than you would financing it.
- Your warranty never runs out.
- Lower monthly payments.
Cons of leasing a car
- You'll never own the car (unless you buy it outright at the end).
- Monthly payments could virtually go on forever.
- Always have to worry about mileage and the condition of your car, since you agreed to specific terms in the leasing contract.
- Can't customize the car in any way.
- End up paying more money long term.
- Get nothing out of it once your lease is up – you haven't made any progress towards paying it off, just have to start over with a new car.
Pros of buying a car
- You own the car.
- You can modify your car as you please.
- You can put as many miles on it without getting hit with a fee (keeping in mind your warranty).
- You save money over the long term.
- You can sell the car or use it as a trade-in the next time you buy.
Cons of buying a car
- Have to deal with the hassle of deciding when it's time for a new one.
- And then the hassle of trading it in or selling it.
- Limited warranty that can run out before you're done with it.
- Pay the full price of the car, so can only get what you can afford.
- Higher monthly payments.
How buying a car works
If you choose to buy your car, you basically have 2 options: paying with cash or financing it. If you choose to finance, you have 2 more options: financing through the dealership or taking out a personal loan.
Let's look at both main options individually.
Paying with cash
It's as simple as it sounds: you pay for your car in one lump-sum payment straight to your dealer.
When you pay in cash, you bypass all interest payments, which can save you thousands of dollars.
Sometimes the dealer will even offer you a cash discount on the car.
Financing the car
If you don't have enough money saved up yet (don't worry – I didn't either), then your other option is to pay for your car through financing.
This can happen directly through your dealer at an interest rate that you negotiate, or through a personal loan from your bank.
Sometimes the interest rate can be better at your bank, so it's always a good idea to shop around for loans before committing to any one dealer.
And watch out for the 0% financing deals…it's not always what it seems and might end up costing you more money in the long run.
How leasing a car works
Leasing a car means you're renting it for a set amount of time. In the contract they'll list how much it would be to buy the car at the end of the lease, but if you don't want to buy it, you'll have to give it back to the dealer.
There are many factors that go into determining how much your lease will be, the 2 biggest numbers being:
- The capitalized cost: The value of the car that you and the dealer agreed on, negotiated down from the MSRP (Manufacturer's Suggested Retail Price).
- The residual value: The estimated value of the car at the end of the leasing period, minus the depreciated value.
Basically, you and the dealer decide how much the car is worth today and at the end of the loan. You then sign an agreement to pay for the difference over the course of your lease:
Car's value today – car's value at end of lease = your cost
Both of these values can be negotiated down, so try not to agree to the first number the dealer pitches to you.
The interest on leased cars
You then have to add interest to this cost. But be careful – the interest rate is sometimes expressed as a fraction, known as the money factor.
For example, if they give you a money factor of 0.002, don't assume this means 2% interest. To get the true interest rate, you actually have to times it by 2,400. So a money factor of 0.002 is actually an interest rate of 4.8%:
0.002 x 2,400 = 4.8
Keep this in mind throughout the negotiation so you don't get confused and think you're getting a better deal than you are. That 2.8% difference can mean hundreds of dollars extra by the time your lease is done.
Used car leasing
So what about leasing a used car? Is it still worth it?
You still get most of the same pros and cons as new car leasing, except you don't get to be driving a brand new car and your warranty might not cover the course of your loan.
3 examples of buying vs leasing: Honda Civic vs. Toyota Rav4 vs. Honda Odyssey
Let's look at examples of one of the top sedans, SUVs, and minivans in Canada: a Honda Civic, Toyota RAV4, and Honda Odyssey.
Keep in mind these are using the un-negotiated prices. You're likely to get different numbers at the dealership.
| Car | Honda Civic DX 2019 | Toyota RAV4 FWD LE 2019 | Honda Odyssey LX 2019 |
|---|---|---|---|
| Cash cost (MRSP) | $17,790 | $27,990 | $35,290 |
| Leasing details | $48.87 weekly 60 months 3.99% |
$81.12 weekly 60 months 5.99% |
$101.85 weekly 60 months 4.49% |
| Total leasing cost | $14,096.86 | $24,554.14 | $29,739.76 |
| Financing details | $56.03 weekly 84 months 3.99% |
$98.07 weekly 84 months 7.24% |
$113.02 weekly 84 months 4.49% |
| Total financing cost | $23,513.30 | $45,778.30 | $48,223.80 |
On the surface, it can seem like the leasing option is best since it's the smallest number in each option. But it's important to remember that you won't own the car once you've paid this amount.
For example, say you were looking at leasing the Honda Odyssey and they tell you that at the end of the 60-month lease, your van will be worth $20,000. If you were to buy the car at the end of your lease, this is how the numbers actually look:
| Option | Leasing (60 months) |
|---|---|
| Cost | $29,739.76 |
| + purchase cost | $20,000 |
| = total cost | $48,644.34 |
If you have to finance the $20,000 purchase price, you're even further behind. And your van will be worth even less once you finish paying it off.
But if you had financed it for 5 years and decide to sell it or trade it in, this is how your numbers look:
| Option | Financing (64 months) |
|---|---|
| Cost | $48,223.80 |
| – potential selling price | $20,000 |
| = total cost | $28,223.80 |
You could also just lease another car, but doing this will make your payments go on virtually forever. Once someone who bought the car finished paying it off after 5 years, you'll still be paying. Indefinitely.
Buying a car new vs used
Most personal finance gurus seem to always recommend buying used. But why?
It's because of depreciating value. This is also what people are talking about when they say your car loses thousands of dollars in value as soon as you drive it off the lot.
What is depreciating value?
When buying any consumer item, it instantly loses value and continues to do so the older it gets (unless it's a collectible that you can make a profit on by re-selling in 20 years). This is because it's worth more new than it is used.
There are many different estimates of the rates at which cars lose value. According to this infographic, this is how much a car is worth over the first 5 years of ownership:
| Age | Percentage of initial price the car is worth | Percentage lost since last year | Example value: Honda Civic |
|---|---|---|---|
| 0 seconds (MRSP) | 100% | 0% | $17,790 |
| 1 minute | 91% | 9% | $16,188.90 |
| 1 year | 81% | 10% | $14,409.90 |
| 2 years | 69% | 12% | $12,275.10 |
| 3 years | 58% | 11% | $10,318.20 |
| 4 years | 49% | 9% | $8,717.10 |
| 5 years | 40% | 9% | $7,116 |
If you buy a used car that's 3 years old, you capitalize on the year with the highest loss of value, while also getting the car when its depreciation starts to slow down.
Pros and cons of used and new cars
So let's look at the pros and cons of buying a new car and buying one used.
Pros of buying a used car
- Lower upfront cost.
- Lower car insurance premiums.
- You're the owner of the car.
- When buying from a dealer, you usually get a free inspection.
Cons of buying a used car
- The car is older, so it's more likely to need repairs.
- If you don't buy from a dealer, you'll have to pay for an inspection.
- Warranty may have worn out, or it will soon.
Pros of buying a new car
- You're getting the newest model.
- Car is less likely to need repairs for the first few years.
- You're the owner of the car.
- Can get a brand new warranty that you can use to its full extent.
Cons of buying a new car
- It's much more expensive.
- You need to pay for all the starting costs, like mats, freight fees, etc.
- Loses value the moment you drive it off the lot.
Getting the most value out of a used car
It's no secret that a new car will be more expensive than a used one, so how can you make sure you get the most out of this extra investment?
There are many things you can do to help your car retain its quality over the years, including:
- rust proofing,
- avoiding gas with ethanol, and
- investing in good, custom fitted mats.
Getting the most value out of a used car
When you're looking at a used car, there are a few important things you'll want to look for.
- Make sure there was an inspection done recently, or pay a qualified (and independent) mechanic to do one.
- Ask for usage history, including any accidents it may have been in and any repairs or services it has undergone.
- Check the odometer to verify how many miles the car has.
- Test drive the car to make sure you like the way it drives and how everything works.
It's also helpful to get a value from a site like Carfax, which uses the price of sold cars of the same model in your area. Carfax can also tell you any accidents the car may have been in that the owner may be hiding or the dealer may not know about.
Related: Car Insurance Companies Canada: Who Should You Trust To Protect You And Your Car?
Trading in vs selling
If you have an old car that you're looking to upgrade for your new one, you basically have 2 options if you want to make some money off it – trading in to the dealer, or selling privately.
The pros and the cons
Here are a couple of pros and cons for each option:
Pros of trading in your car
- It's generally a faster process.
- Buy and sell at one location, in one transaction.
- Get some tax savings because the value of the trade goes towards the cost of your car, reducing the amount taxed.
Cons of trading in your car
- They're looking for profit, so the amount they offer you has a profit margin in mind.
Pros of selling your car privately
- They're just looking for a car, profit isn't a factor.
- You have a chance at getting a better price.
Cons of selling your car privately
- Generally takes a while to sell unless you have a buyer set up already.
- The profit doesn't go towards your new car's price, so you have to pay tax on the full purchase.
How to get the most value for your trade in
Make sure to check how much cars that are the same model and age as yours are selling for.
You can check estimates on sites like AutoTrader. Showing up to the dealership with your research done makes you look more knowledgeable so the dealer is less likely to undersell.
Shop around for different quotes from different dealerships. You can even go to different dealerships of the same car manufacturer in other towns (i.e. check Moncton Honda and Halifax Honda).
Make sure to bring the car in when you're asking for a trade-in estimate. If you ask for one over the phone, they're more likely to give you a higher number in order to get you into the dealership. They might then claim they found something upon inspection that made them reconsider their offered price.
Selling your car online
When you're selling your car privately, you still want to get as much research done as you can. This includes going to the dealership and asking for their quotes, even if you're not intending to go with them.
Use the same sites I mentioned in the previous subsection to check the price the model of your car is going for. You can also list your car on AutoTrader.
Price competitively. Get a mechanic to inspect the car first to save your buyer the trouble, instilling some trust in you.
What about you?
How was your last experience for buying or leasing a car?
Did you trade in? Or buy a used car?
Do you have any tips to share about your experiences?
Let us know in the comments!
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Comments
Hey Anne,
That's a great point to consider that can definitely save you a lot of money. Thanks for sharing!
Hello Melissa,
You're right, selling privately can definitely be a gamble. It always helps if you're able to sell to someone you know and trust, but that's not always possible.
Betting on the used price being higher than the decided-on residual value of the car (which the dealer probably upsold) is a bit risky, but it could definitely pay off in the right situation.
Thanks for the great tip, Curtis!
That's a great pro for buying new and selling the old, thanks John!
Great points, Marpy.
Speaking in terms of weekly payments instead of yearly or even monthly amounts definitely makes it much harder to grasp the full scale of the price – great point. Might be worth your while to ask your dealer to switch to monthly/yearly numbers just to get a better picture of the whole thing.
Asking for extra things is a great way to settle a (relatively) minor difference in price. Also a great point!
Thanks for your comment. :)
Hello Cheryl,
That's an insane cost for paperwork. Really wish I knew that before buying my last car, but I'll know it for next time...
Thanks!
You're right – I should've gone into more detail about the benefits of insurance. And I didn't even consider market risk.
Great points! Thanks for sharing.
That's a good point, Roger.
Though you're more likely to still have your warranty at the time of the accident with a leased car, I wonder how much the dealer would factor this in when it comes time to re-evaluate the price at the end of your lease.
That's a good way of looking at it, Greg. Definitely a benefit of having a new car all of the time.
Thanks for your comment!
Investing the cash instead is definitely an interesting option, but there's no guarantee that over a 5 year period you'll make more in interest with investment.
Thanks for the question! Hope this helps. :)