When it comes to enjoying Canada to the fullest, getting a new car is probably high on your priority list.
Today we’re going to talk about all the basics you should know about getting a new car so that you can easily get where you need to go without having to rely on costly ubers or public transportation.
First, we’ll delve into the age-old dilemma “should I buy or should I lease?” by covering topics such as car loans and how exactly leasing works. Then we’ll talk about where you should be looking.
Let’s jump into it.
Should I buy or lease?
Most people will have this question cross their mind at some point when they start thinking about getting a new car. If there was a definitive answer, it wouldn't be such a widely asked question. The answer is that it depends on your current financial position, personal preferences, travel habits and a lot of other factors.
First, we’ll cover some things you should know either way:
Set a final price: Before going with either option, it’s best practice to establish a definitive selling price with the car dealer. It sometimes happens that people negotiate lower monthly costs and don’t take the final amount into account. Spreading payments too long: Adding more months or years to your loan or lease payments will seem attractive because it’ll lower the monthly costs, but it will also increase the total amount due. Average car ownership: The average car owner in Canada owns a car for 6.4 years. Cosigner: A major factor in getting favorable loan or lease terms is your credit history. As a newcomer, this might work against you. Newcomers generally get stuck paying higher interest rates. One factor that could help you a lot is having a good friend or relative with great credit cosign on your behalf. Cosigning is basically a way for you to borrow part of someone’s credit.
With that in mind, let’s first cover your options when you decide to buy new.
What are my options when I buy new?
When deciding to buy new, you have two options: Pay in full or finance it through a car loan. Most people are not in a position to outrightly pay in full and if you are, it’s often the cheaper and simpler choice that you should go for. Because the majority of people aren’t in a position to pay in full, we’ll focus more on the option of financing.
To better understand if you should buy instead of lease, you need to have a good understanding of your two major options when it comes to car financing: dealership financing vs. bank financing. Car loans and interest rates: Dealership vs. bank financing
You have many options when it comes to choosing the best car loan. This means that though we will give you the basics, you should still do lots of research for your options in your specific area.
Here are some high-level things you should consider.
If you don’t have much of a credit history, it’s good practice to get pre-approved for a bank loan to help you negotiate with a car dealer. The more options you know, the better.
Keep in mind that dealership loans are often still through a bank, but the dealership acts as the middleman. This means they will often markup their price to account for their service. Let’s say they negotiated a decent 2% interest rate with a bank; they may quote you 2.5% instead and pocket the difference. They often will try to lure you with zero percent financing, but usually these are aimed at people with great credit. Suppose you’re a newcomer and don’t have a cosigner with amazing credit. In that case, you’re unlikely to get zero percent without other hidden fees or very strict terms.
On the other hand, when you go straight to a bank, you’re going straight to the source. This doesn’t necessarily mean that banks will give you better rates, as it depends on many factors which we’ll talk about in a bit.
Do your homework on banks and see which dealerships they partner with. The knowledge from this can help you bring up specific loan programs like certain newcomer programs that car salesmen might not bring up themselves.
Note: The exception to dealerships acting like the middleman is when they offer in-house financing which is often always costlier in the long run. Another major downfall of in-house financing is that it’s common for dealerships to not report your payments to credit bureaus As a newcomer, you might want to use this as an opportunity to build credit. Let’s put it this way— in-house financing is often a Canadian’s very last resort if nothing else works.
With that being said, let’s now look at some factors to consider when deciding between dealership financing or bank financing:
Down payment: How much money do you have put away for a down payment? Down payments are generally higher for dealership financing (10-20% of car price) vs. banks.
Incentives: Car dealerships are known for incentives like factory rebates, dealer discounts, and other incentives (“0% financing!” “0 down”) to lure you in. These can vary a lot from dealership to dealership. So, be sure to spend some time researching your options and getting clear on the small print. They might sometimes be truly good deals.
Negotiation: Are you a confident negotiator? Car dealers are more open to negotiation on final price because they often work on commission and profit margins, while banks aren’t as willing to negotiate.
Convenience: Sometimes, it’s more convenient to deal with one place. If you’re itching to walk away with your brand new car as soon as possible, bank financing may be a longer process.
Now that you have a better idea of your financing options let’s explore leasing and how it works.
How does car leasing work?
Newbies to the car buying process often get leasing and financing slightly mixed up. Both offer ways of paying the cost of a car over a lengthy period. However, they’re very different.
Leasing generally is for the length of 2-4 years. It is very similar to leasing an apartment lease in that you pay a monthly rent to another owner. It’s essentially a long-term rental, so your flexibility in what you can do with the car is quite limited.
Instead of paying the price of the car, you’re paying the amount it’s said to depreciate over the length of your lease. For example, suppose a car costs $20,000 today and it’s projected to cost $12,000 at the end of your lease in two years. In that case, you will pay the difference ($8000) over the two years, plus interest and other fees like rent charge. You can buy out the car at the end of your lease term, but this is rarely the cheaper option vs. just financing the car.
Let’s now sum it all up:
Pros & cons of car leasing
Lower down payment: Leasing generally calls for lower down payments, so if you don’t have much money saved, this may be the only realistic option. Novelty: If you plan to drive a car for a long time, like over six years, buying a car would be the best option. However, if you’re a car fanatic or get bored easily, leasing may be a good option for you. Leasing allows you to experience more cars every 2-4 years with no ties to the former. So are you into luxurious cars? Do you get bored easily? Lower monthly costs: Leasing will allow you a cheaper cost per month than a car loan would.
Less flexibility: When you lease, you’ll be limited to a certain amount of kilometers per year. This amount is negotiable, but after you reach your limits, you’ll have to pay additional charges for going over. Higher insurance: Insurance is more generally more expensive for leased cars. More expensive in long run: You could be paying monthly costs forever until you decide to buy a car. No asset: Unless you choose to buy at the end of your lease, your monthly costs essentially disappear into thin air as you have nothing to show for.
Pros & cons of car financing
No kilometer limits / More flexibility: When you buy a car, it’s your property, so you can essentially do what you want with it. This includes many types of customizing, unlimited driving, and much more. Lower insurance: Insurance is mandatory in Canada, so this is something to be mindful of with your budget. Investing in an asset: When you’re paying off a car through a loan, you can have the peace of mind that your money is not going totally to waste. You’re putting it towards an asset. Save money in the long run: There’s not much debate on this end. So if you think there’s a high chance you’ll want to buy at the end, I’d double think before leasing. Take advantage of newcomer friendly loans: In recent years, major banks and manufacturers in Canada have come out with programs specifically tailored to help newcomers with no credit history. It’s not as good as the options that people with good credit have; however, it’s a lot better than what you used to be stuck with. Start by looking through the programs of Scotia Bank, RBC, and other major banks in Canada.
Higher down payment: Down payment is generally higher for financing vs. leasing Significant depreciation: A new car depreciates most within the first two years (up to 20% value in first year alone). Keep in mind this would be calculated into your lease payment. Higher monthly costs: Monthly costs are generally higher for the same vehicle when you buy and finance it. Lengthy payments: If you opt for a longer payment schedule, you risk getting trapped paying for a car you no longer own or that’s needing lots of repairs. Aim for no more than five years and ideally less than four years.
Where to find new cars:
The smartest way to begin your search for new cars is online. Search online for car dealerships nearby, go to manufacturer’s websites, and even be mindful of advertisements. Websites offer an objective way to review cars without the influence of a car salesman. Some popular websites in Canada are the following:
As a rule of thumb, do a good amount of research before taking your first step into a dealership.
From deciding between buying and leasing and between dealership financing or bank financing, you have many options when it comes to purchasing your first new car in Canada. Doing proper research could easily save you thousands. As you can see, there are pros and cons to every option, do your research, save money, and good luck!