Don’t Drive Yourself Into Auto Debt

According to recent reports, auto sales in Canada are on track to reach a new record for 2014, with optimistic consumers tempted by low interest rates, longer loan amortization periods, dealer incentives and more recently, lower fuel prices. It seems like a great time to buy or lease a new car. 

Not surprisingly, Equifax announced yesterday that consumer debt in Canada has reached a new record, sitting at $1.5 trillion, or $20,891 per person, with auto lending representing one of the fastest areas of debt growth in the past year.

In my work as a Trustee in Bankruptcy and Consumer Proposal Administrator, my job is to help individuals deep in debt find a solution to their financial problems and help them understand how they got into trouble in the first place. Too much debt is generally a function of one problem: spending more than you earn. One area where I commonly see a problem is auto debt and vehicle costs, which can easily spiral out of control if not carefully and consciously planned out.

If you are looking at purchasing or leasing a new car, consider the following tips:

1. Determine what you need

A common mistake made by vehicle buyers is buying more car than they need. Sales of high end luxury vehicles are on the rise, yet they don’t get you from A to B more efficiently than an economy vehicle (unless you’re on a race course). Bells and whistles are nice, but they only end up costing you significantly more than the price of a more basic model. This consideration of need also extends to the size of your vehicle. An SUV or minivan provide lots of roomy comfort, but they cost more to operate than a more compact car.

2. Determine your budget

Your budget should be considered on two levels: one, how much can you spend monthly? And two, how much total debt can you afford to take on?

Auto retailers are very adept at selling you on a monthly payment. But a contract to lease or purchase a car is more than a monthly payment – it is a long-term contract that spans several years and carries with it many costs and responsibilities.

Take a hard look at your cash flow and determine what you can afford to spend. Remember to consider insurance payments, fuel, vehicle maintenance, parking and road tolls, if applicable. 

Overall, keep in mind that financial experts recommend no more than 15% of net income be spent on transportation. If your net monthly income is $2,500, that means your total vehicle costs should be no more than $375 per month.

3. Do your research ahead of time

Before shopping, take advantage of the internet to research automakers, models, consumer reports and any other resources you can find to help you make a decision based on fact, not feeling. Talk to friends and family, make phone calls before you go shopping and have an idea of what you want to look at, and where. As you begin to build a picture of what you are looking for, use the web to find the best prices and sales.

Before committing to a new vehicle, you should also speak with your bank about financing options or speak with a dealer’s financing department to get an idea of financing options and rates.

4. Shop with a list and stick to it

Once you know what you need and what you are willing to spend, write it down as you would any shopping list and take it with you. Let the salesperson know exactly what you are looking for and don’t be steered away from it. Shopping without a list will make you vulnerable to impulse buying and regret.

5. Negotiate

When shopping for a vehicle, price is always negotiable. If you are not comfortable negotiating the price of a vehicle, bring along someone who is. Before committing to a lease or loan contract for the vehicle of your choice, ensure you are getting the best possible price, even if it means comparison shopping at another dealership.

The happiest and most successful car buyers are those who have done careful research, who know what they need and what they can afford to spend, and who are confident they have obtained the best possible price. Avoid falling into the trap of buying more than you need and spending more than you can afford to spend. Practice safe shopping as you would safe driving!