Purchasing a vehicle will be one of your biggest expenses, especially if you’re going the financing route. An auto loan is a long-term commitment and will impact your finances and budgeting for years, so it’s very important to make the right choice that fits your needs and financial circumstances. Sure, it’d be nice to have a sunroof, automatic seatbelts, and a touchscreen, but at the end of the day, a vehicle is a tool for transportation. If buying a less sophisticated vehicle means saving thousands of dollars over the course of the financing term, these amenities might not be as appealing. This post is a step-by-step planning guide for someone considering replacing their existing vehicle. It includes factors to consider when deciding between a new or used vehicle and provide financial insight into the planning and budgeting stage before even setting foot in a dealership.
Step 1: Pre Planning
Before you even go vehicle shopping, take some time to do some preliminary planning: -figure out what type of vehicle that you would like (Small SUV, Car, Truck, Van, Large SUV) -ask your family, friends and colleagues to get their opinions on their experiences with various dealerships as well as their likes/dislikes for various types of vehicles -work on saving up a deposit for the vehicle -make a list of your “must haves” (air conditioning, touchscreen, backup camera, etc.) -get a copy of your credit score, if you do not know already know this information -make a budget and figure out what the highest vehicle payment you can afford is based on your budget – do you have an emergency fund to cover 3-6 months of expenses?
Step 2: Going to the Dealership or Contacting the Seller
Before stepping foot in a dealership, decide whether you’d like a brand-new or used vehicle. Some pros and cons of buying new vs. buying used are outlined below:
Pros -vehicle will be in pristine condition -minimal repairs are needed other than regular maintenance -may be able to bargain for winter tires, maintenance and other as part of the sale -if you have a good credit score, you can qualify for a better financing rate (sometimes even get a deal if they need to clear out their inventory) -warranty could cover any significant repairs needed in the first years of the vehicle’s life -Promotions (such as Costco membership, are there any discounts?) Cons -dealership may talk to you into buying “more” vehicle than you need. Don’t be afraid to say no or walk away if they are using high-pressure sales tactics such as limited time deals -Look at the TOTAL cost of financing a vehicle! By financing a vehicle, you are paying interest on top of the principal payment (this is the sticker price of the car). You can use an online calculator to help you determine this total cost.
Older and Used Vehicles
Pros – the total value of loan and the vehicle value is typically less -could be more affordable over a the financing period, depending on the interest rate. It is very important to create a budget to determine a vehicle payment that is affordable for you -dealerships want to move used vehicles quickly, so may be able to bargain more to get a sale Cons -ask about the finance rates for used vehicles, financing rates could be higher than on a newer vehicle -maintenance costs annually could be more significant in the first 3-5 years of the vehicle ownership -unknown if there are any issues if they were not disclosed; consider enlisting a certified technician to inspect the vehicle. You can click here to find an Alberta inspection facility. -if you do not have good credit, you may end up payment a large amount in interest Before committing to a decision, ask for some time to reach a decision. Often there’s no need to rush into this despite the common sales tactic of creating urgency. Request for preliminary financing documents.
Step 4: After the Dealership
After going to the dealership, review the information with someone that you trust with numbers. Some tricky but important questions to ask yourself between meetings:
- if you were off work for 2-3 months, could you maintain the vehicle payment? Are there savings that you could use to still make this payment?
- do you have room in your budget to contribute to an emergency fund to cover 3 to 6 months of expenses?
- can you afford biweekly payments (i.e. 2 extra payments yearly) in your budget?
- make sure you are not paying a significant amount over and above what the vehicle is worth, especially if you are refinancing
- is this urgent (will my current vehicle need to be replaced in the next 6 months?) or could I save up a higher down payment and end up financing less (paying someone else) for the benefit of financing today and how much would I save by doing so
Step 5: Confirm the Information is Received
With the preliminary financing document. Use a vehicle finance calculator on the internet and confirm the accuracy of the payments. If the payments are not accurate, ask your salesperson to clarify. Read the fine print in all agreements to ensure that the terms are to your comfort level. For example:
- Is there a possibility of payment deferrals?
- Would you be penalized?
- Ask for time or see if they can email you a draft contract
Step 6: Reach Out With Any Questions Before You Sign the Agreement
Usually they are happy to email you the answers or schedule a follow up meeting. Confirm as much of the information as possible and ask concrete questions For instance: “just to confirm, this vehicle is on a 60 month-term and the payment would be $250 biweekly? And “just to confirm, the total cost of financing would be $X amount?
Other considerations For Buying a Vehicle
5 years is a long-term commitment for a vehicle loan, but some companies will offer an even longer term. Whether you should accept a longer term depends on your circumstances: will the smaller monthly payment help you in the short-term because of your existing debt? Otherwise, you will incur more interest cost in total and you will have substantial negative equity on the vehicle, especially at the tail-end of the loan term.
If you are struggling with maintaining your current vehicle payment, or your budget seems difficult to manage, you may benefit from meeting with a qualified Licensed insolvency trustee. We strive to educate everyone as to what their options are and would be happy to review this based on your individual circumstances! Please contact us at 587-269-3009 or reach out to our awesome team via the link below.
Resources: If you are purchasing a pre-owned vehicle in a private sale, please read this guide: Guide to buying a used vehicle in Alberta from the Government of Alberta