Car Buying Guide – Part 2 – Financing Your New Vehicle Purchase

Lease or Finance? The quick response to the question of whether it’s best to lease or finance a new car is to simply pay cash. It’s the most simplest option, and also happens to be the least expensive one as well. But, like most Canadians, I wasn’t in the position to drop $20k on the go. Instead I decided to finance my new used vehicle purchase.

Before I embarked on the car shopping journey, I compared all of my options on financing, leasing, and even paying in cash which fell quickly out of favor after I realized my rough purchase price. I also came to the realization pretty quickly that leasing a vehicle was not for me either, therefore leaving me with the option to finance the car.

Here’s a breakdown on why I chose to finance my vehicle purchase, and how the financing breaks down over the next 48 months.

NO LEASE FOR ME

I opted not to lease simply because I plan to keep the car anywhere from 3-6 years. Secondly, most of the depreciation on the majority of vehicles occurs in the first 2 years of life of the vehicle, therefore I saved a minimum of 30% or more on the initial price of the vehicle, plus the savings on the freight, PDI and other fees of buying a new vehicle.

A new 2013 BMW 3-Series list for roughly $39,000, depending on the options that come with the car. I purchased my 2009 BMW 3-Series for $20,100 including the interest financing charge for 48 months and the vehicle transfer fee. At the end I saved roughly 48% off the list price for a 3 year old vehicle with 75,000km.

For most people leasing makes no sense. One reason that leasing is more costly today as the lease rates are virtually the same or higher at times than financing rates. Furthermore, a large upfront down payment is needed, which in essence is like giving cash away for free, and most importantly the large buyout that’s waiting for you once your lease is up if you choose to keep the car. You should be mindful of wear/tear fees at the end of the lease as well. For example, majority of the BMWs today are equipped with run flat tires, and at the end of the lease all vehicles must be returned with run flat tires that pass safety. More than likely after 3-4 years of driving a leased vehicle, I would have gotten dinged with having to replace all four tires. Yes, I know this is normal wear and tear, but on a financed car at least I get to keep the tires. On average run flat tires cost $350 each or $1,400 for the set depending on the make and tire size, which would further add to the cost of the lease.

SEARCHING FOR THE BEST INTEREST RATE

The finance rate was something else I devoted a lot of attention to, and got quotes from three different financial institutions.One should always compare financing options available, and choose what works best for them. During my quest for great financing, I compared the rates with the following three sources:

• My current lender & home bank – Royal Bank of Canada (RBC)
• High volume used car finance lender – TD Auto Loan Financing
• Car dealership financing – BMW Financial Services
  

And after much comparison, I chose to finance my car purchase through the dealership (BMW Financial Services) for the following reasons:

Your main lender is not always the best choice – Since most of my banking is with RBC, I kicked the tires with them first, and the best rate that RBC was able to offer me was 6.26%, and that’s after I negotiated them down from a 6.90%  posted rate. I saved 3.36% in interest rate, and potentially hundreds of dollars by doing a little research and choosing not to settle.

Open Term – I financed the car over 48 months (4 years), and the loan is open, meaning I could pay it off anytime from now until it terminates in 2016.

Attractive Rate -  The rate of 2.9% is pretty attractive on financing a used car. And out the different financing options I considered, BMW Financial Services rose to the top with their attractive financing rate.

No Closing Fees – There’s nothing to pay upfront or at the end of the financing term. Also, the down payment was flexible. I could have gone with as little as $500 for a down payment, but I wanted to put down as much as possible.

THE NUMBERS

The price of the car came to around $20k, including taxes and financing charge for 48 months.  I put down $2,000 and my bi-weekly payments for 48 months at 2.9% interest will be about $429. Which I am comfortable with. I could have lowered my bi-weekly payments and gone with a 60 or 72 month term, but I know I can pay off the car in 4 years or less

2009 BMW 3-Series

List Price – $19,200

Purchase Price – $17,495

Total Negotiated Discount – $1,705

Financing Rate – 2.9%

Monthly Payment – $429

FINAL KEY POINTS

1. You should work to pay off your car loan as quickly as you can. Then begin to save that money so that you can pay cash for your next car. This will give you a lot more financial freedom, and it will help you to break the car loan cycle. I set a goal to pay off my car loan in 36 months. Can I do it? Time will tell.
2. Remember that buying a new car, you’ll absorb most of the depreciation. You lose money the second you drive it off the lot. In order to mitigate the depreciation, look at your options for buying a new used car. 
3. If you’re financing through the dealership, don’t be afraid to ask for an even better price. The dealership is always getting a kickback for every financing deal that they put through.
4. Shop around to find the best financing rate that works for you. Remember, your home financial institution will not always offer you the best rate. They’re in the business of making money, and your main priority should be to save as much money as possible. 
5. Keep in mind that ideally the car you finance should be paid off within 3-4 year under any financing option. If you have to extend the term in order to afford the monthly payment, you’re buying too much car. 

Thank you for sharing your time with me today, and I hope this post has opened up your eyes on car financing for your next vehicle purchase.

Cheers, and all the best to you!

Now that I’ve talked about my experience, I’d like to know about yours; What has been your experience with leasing or financing a car?

Eddie