According to Kelly Blue Book, Canadians paid an average of $33,500 for a new vehicle in 2013. Five years later, that cost rose to $36,100. The price of a used vehicle increased by $2,500 in the same time period. While notably smaller than the increase that occurred between 2015 and 2016, it’s not factoring in the overall increase in the cost of living.
This has made buying a new car no less simple, especially considering the myriad of financing options available on the market today. Add in your running costs and it can seem nearly impossible to ensure that you’re getting what you pay for. To make things a little easier, here’s a primer on new car financing options.
The most affordable way to buy a new car is, and always has been, to pay cash. This way, you can avoid the interest rates associated with any loan or financing agreements. That said, it’s not always viable. You need to ensure that you’ll have enough money left over to cover your monthly bills and any emergency expenses that may arise.
Leasing involves paying a fixed monthly amount for usage, but not ownership of the car. Provided the mileage doesn’t exceed a set limit, servicing and maintenance is typically included in the monthly fee.
Come the end of the lease agreement, you’ll have to give the car back to the dealer. Leasing is often the most expensive option and you typically need to provide a deposit of three months’ rental. However, you won’t have to worry about depreciation, and payment periods are generally flexible.
You can either obtain a personal loan from a bank or finance provider, or from a company that specializes in vehicle financing. The latter will naturally be more affordable as it’s geared specifically towards buying a car. The cost can usually be spread over several years. This works out to be the cheapest option, second only to cash.
With hire purchase, the loan is secured against the car. Before making fixed monthly payments over an agreed time period, you’ll have to make a deposit of around 10 percent. Only when you make the last payment does the car become yours. Payment terms range between 12 and 60 months. It’s worth noting that short-term agreements tend to be pricey.
Personal Contract Purchase
Personal contract purchase is more or less the same as hire purchase, except that you don’t get a loan for the full cost of the car. Instead, you get one based on the difference between its purchase price and predicted value at the end of the payment term – based on the annual forecasted mileage.
Come the end of the term, you can either choose to hand the car back to the dealer and pay nothing, or trade the car in for a new one. Alternatively, you can make one final payment, known as a balloon payment. This tends to be a significant amount that makes the overall cost much higher.
The best financing option ultimately depends on your budget and needs. If you can’t pay cash, a car loan is your next best option.