It’s that time of year again – car clearing season; and the ads are definitely meant to be enticing. Whether you’re looking to replace your vehicle or just think that the cash back might give you the debt help you need, before you commit to any credit payments, look at the ads and offers more carefully. Here’s where to start:
Consider Alternatives to Save Money
Recognize that the sole purpose of a car ad is to get you onto the car lot. However, before you start thinking about a new vehicle, think about what you really need it for. You might be able to save some money, even temporarily for 6 – 12 months, by taking transit to and from work. Insurance, fuel, maintenance and finance payments can really take a chunk out of your pay cheque, so the money might be better spent to pay off debt.
There are a lot of tips to help with debt repayment, and the best ones all suggest that someone with debt problems find ways to increase their income, decrease their expenses or both. Saving on vehicle costs is one way to decrease expenses fast.
If you’re able to go without a car, or to only have one car in your household, use the money you save to pay off debt. Even if you were to take a taxi once a week, or chip in when sharing a ride with a friend, or take transit it would still add up to much less than buying a new vehicle right now. The average person spends over $9,000 per year to own and operate a vehicle. Even if you spend less than this, you're still looking at some huge savings if you can eliminate a vehicle from your budget.
Consult Your Budget before Purchasing a Vehicle
The car ads are attractive and make it seem very easy to afford a new vehicle. But replacing a vehicle is a big decision. Look past the enticing offers and let your budget help you decide what to buy. This will ensure that you make a smart financial, rather than emotional, commitment to your ride. If you’re not sure where to start, get help to start budgeting and see what you can afford by contacting a non-profit credit counselling organization.
What to Watch Out for and How to Avoid Vehicle Financing Problems
If you decide that you really do need to buy a vehicle, here are some things to keep in mind as you look at the car ads:
1. Weekly car loan payments
Most people don’t budget for weekly loan payments, so while an ad may highlight a small weekly payment amount, it’s wise to calculate what the equivalent bi-weekly or monthly payment would be for you.
To figure out what a monthly payment would be, take the weekly payment in the ad (e.g. $144), multiply it by 52 weeks (e.g. $7488), then divide that number by 12 months (e.g. $624). You can’t just multiply it by 4 because there are more than 4 weeks each month. Did you think that $144 per week would come to $624 per month, just for the loan payment?! Then you still need to add insurance, fuel and money for maintenance.
If you are wondering what your car loan payments might look like or want to see what a few different scenarios would cost you each month, try a car loan payment calculator.
2. Cash back to pay off credit cards or to go on vacation
While it may seem like cash back would be a good debt solution, the extra cash is actually a loan and is added to the price of the vehicle. The car dealer isn’t your rich friend who will just give you money to help you get out of debt. They are in business to make money and are watching out for their bottom line. You should do the same for yours. So beware, if you are financing your new car through a dealer, your loan will be higher and for more than the purchase price of the car.
3. Zero percent financing for 48 months
When the dealer processes your credit application, your credit score will determine if you qualify for zero percent financing. Only clients with a really solid credit rating qualify for the best rates. The great deal on the car may not be so great if your loan rate is 7% or higher. If you want to rebuild your credit rating, the money you save by not having a car and paying off debt will help you become debt free faster and get a good credit rating again.
4. Buy-out at the end of your loan
Sometimes the low interest period (e.g. 48 or 60 months) won’t be long enough for you to repay the entire car loan with payments you can afford or qualify for. If this is your situation, be aware that there may be a buy-out at the end of your loan. People are typically familiar with buy-outs at the end of a lease, but not a loan.
When considering if a new vehicle is right for you, do your homework before talking to a dealer. Consider what you can afford each month for payments, insurance, fuel and maintenance. A realistic budget can help you decide.
To maintain the warranty if you buy a new vehicle, you must adhere to the required maintenance schedule laid out in the owner’s manual. Many dealers have additional maintenance suggestions, which can amount to costly extras you didn’t anticipate. Ask ahead of time what you need to know about warranty costs and carefully factor these additional amounts into your budget.
It’s easy to dream about yourself behind the wheel of a shiny new car, but without a little planning, your new vehicle can turn your dreams into a financial nightmare.