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

To all you moms out there: Happy Mother’s Day!

There is no more important job in the world than that of being a mother. I’ve been blessed with a great Mom, a beautiful soul, and the hardest working person I know. Work? Nothing comes close to the work a mother puts in to raising her family. Remember to appreciate your mom’s, respect them for who they are, and cherish every moment you have with them, both the good and the bad, because how you look and what you are deep down inside has a lot to do with your mom. As a son to a proud mother, I’ve learned to look past what I see as criticism, and as I continue to evolve as an adult, I’m understating more so than ever that I’m loved more than I can imagine, even though I may not fully understand this love until I become a parent one day.

Let us stop and give thanks to the special people we call. . . Mom!!

In spirit of Mother’s Day I’d like to share a video called, “Reflections of Motherhood”, a video made by Canadian Marketing company Un-Marketing. Enjoy.

Here’s this week’s great reads from around the personal finance blogosphere.

GMBMFB – Why Quebec students need to stop striking is a very well complied post by Krystal which came under some heat, and rather turned into a personal argument. People, it’s just an opinion of one person, no need to get all personal.

Bargain Moose -  Need a mother’s gift, but on a tight budget? Here are 7 frugal mother’s day gift ideas.

Untemplater – Sam is taking a sabbatical and possibly never coming back! One of his biggest fears is looking back on life and regretting not taking more chances.  So, he’s thinking of not going back to work and rather continuing to work for himself by continuing to build his online empire and consulting services.

20′s Finances – Summer is coming and the months of hot temperatures and increasing electricity use are nearly here, so here’s a great post on how to lower your electric bill.

Modest Money – Summer is around the corner, and there’s not better time to earn some cash on the side. Here’s a post on  5 wacky ways to earn side income during the summer.

Sustainable PF – A neat post and I learned what crowd funding is and how it works. For all you small business owners, make sure you read this post, it may be worthwhile benefit for your small business in the future.

The Financial Blogger – How important is job security for you? Job security when you are young is not all that it’s made up to be, because staying in your job too long and getting  4% raises per year wont get you ahead. So, do you care about job security?

Yes, I’m Cheap – Sandy writes a post on Spirit Airlines charging $100 baggage fees. That’s high anyway you slice it, and a total highway robbery. Earlier in the year I wrote about how airlines charge to check bags =  one big cash grab.

Thanks for stopping by and reading. Enjoy this special day with your Mom, and again Happy Mother’s Day 2012.

Finance Fox feature’s and mentions:

One Smart Dollar – Carnival of Financial Camaraderie – Mother’s Day Edition

Passive Cleaning Income – Your tax options for going into business for your self

Until now, I’ve owned four cars, and this newly purchased vehicle happens to be my fifth.  The first car I bought with the help of my parents was 1993 Mazda 323. I drove the car for a year, and in my first year of college en route home from my then girlfriends house I ended up getting into an accident, and wrote the car off. Thankfully I wasn’t deemed at fault, insurance paid me out and that led me to buy my second car, 1991 Golf GTI. I’ve always wanted a V-Dub, so it didn’t take me much to find the car I was looking for. After four years of driving the V-Dub, it started having problems, so I decided to sell the car to a guy who wanted it for the engine. My next car and also my third,  I purchased a 1999 Saab 9-3, which only lasted me for two years before the transmission gave out on me leaving me scrambling to buy another car – 2002 Oldsmobile Alero and also my fourth car. The Alero lasted me for four strong years, with no major hiccups, and with 239,000km on the speedometer, a need for a new muffler, I decided not to fork out any money into it and instead opted to buy a new used vehicle.

Now you’re probably wondering what I bought…..so without further ado….drum roll please……………I purchased a new used 2009 BMW 3-Series.

I always found it interesting that almost every personal-finance blogger recommends buying a used car. The universal agreement is that new cars depreciate quickly, are more expensive on insurance and are generally not a good investment for young people. I agree. I’ve read a lot of articles over the years on buying new vs. used cars, and have even written a few pieces my self on how used cars are the way to go. While used cars are a very good way to go, new cars are a great choice for others. Melissa from BrokeTO purchased a new vehicle, it works for her situation and she compiles a good argument on why she bought new. Read her post here.

Despite some compelling arguments on buying a new vehicle, I opted to stick to my guns and purchased a new used vehicle.  Here’s why I chose to buy a new used car.

DECIDING TO BUY A NEW USED CAR

I spent months deliberating on whether to fix the Olds or buy a new used car. The Olds has a Black-Book value of around $1,000, and to repair the exhaust I would have had to spend $600. The repair equates to 60% of the car value, which simply didn’t justify the repair. Probably within the next year I would have needed new front brakes and rotors ($300), which further justified my thinking on not wanting to invest anymore into the car. So, instead I opted to to purchase a new used car instead.

QUESTIONS I ASKED MY SELF BEFORE CAR SHOPPING

1. How much can I afford?

I wasn’t focusing as much on the price of the car, and instead I focused on a monthly payment that fit my budget. Initially I wasn’t set on a car make, but was open to seeing what was out on the market. Secondly I wanted to finance the new used car to a maximum of four years (48 months), with my ideal goal of paying it off in full in 36 months.

I also focused heavily on the finance rate, and got quotes from three different financial institutions. Since most of my banking is with RBC, I kicked the tires with them first and the best rate that they were able to offer was 6.26%, and that’s after I negotiated them down from a 6.90%  posted rate.  I also called TD Bank’s Car Financing center who finances a lot of used car sales in Ontario, and they offered me a rate of 4.99%. Not bad, but I wanted better. Finally, like any other major dealer, BMW offers their own financing, and the rate of 2.90% over 48 months was too good to be true. More on financing in another post, and in the mean time here’s a snapshot of BMW’s financing options.

2. How much will insurance be on the new used car?

This is where it got interesting. I really did my homework, and over a two week span I called ten insurance brokers and/or companies to gauge what I could be expecting to pay for insurance on my new purchase. One thing I should add is that by this point I narrowed my car search down to these brands:

1. BMW 3 Series
2. Mercedes Benz C Class
3. Nissan Maxima
4. Lexus 250/300

My insurance research was interesting to say the least. I paid $195 per month on my 2002 Oldsmobile Alero, and that’s with a clean driving record. Yes, insurance is expensive in Toronto, Canada. The insurance quotes I got ranged from $2,200 on the low-end to as high as $3,900, which is insane and it equates to $325/month or an increase of 66% over my existing premium. Thanks, but no thanks. Long story short, I ended up switching insurance companies. I’ll explain this more in detail in another post specifically pertaining to car insurance.

3. What big expenses do I have on the horizon?

I re-created my budget repeatedly, and worked the numbers over and over. I took into consideration my property taxes, income taxes that I knew I’d be owing, student loan repayment, line of credit and other debt that might arise along the way. My goals was to minimize risk in case any large expenses happen on the horizon.

I’m proud to say that I didn’t become that guy after college who lands his first big gig, and his first purchase ends up being a new car. Instead I bought a home at 25, and three years later I’m buying my first new used car. This also happens to be the first car that I financed, as the previous four vehicles were paid in cash.

4. Car Maintenance Cost

Maintaining a car gets relatively more expensive as time goes on because the value of your car is always decreasing while maintenance costs are the generally increasing component through deflation. One of the bigger reasons behind my choice to purchase a BMW over any other brand is because a close friend is a mechanic at one the local BMW dealerships. I would get free assessments, 50% off parts and most importantly the labor would come at the fraction of the cost. There’s another  reason for choosing to go with a with this car brand – BMW Certified Series. The base vehicle warranty on any BMW is 4 years/80,000km. The BMW I chose to buy still had 5,000km of warranty left, because the car already had 75,000km at purchase, and after the base warranty expires I got an additional 2 years or 150,000km, whichever of the two comes first. Obviously the 2 years will come way before I hit 150,000km, but a two year manufacturers warranty is a great peace of mind when buying a new used vehicle.

5. Resale Value

At first, I didn’t think much into this idea. After all, I would probably just drive whatever car I got into the ground instead of selling it. So, I thought about what would happen if you sold it in 5 to 7 years. I researched what BMW’s 4-7 years older were selling, and the price points were pretty interesting. Also, during my resale research a close friend purchased a 2004 BMW 3-Series, which also happened to have 234,000km on it for $4,900. Nice price point, especially when I compared my old car was only two years older and had approximately the same mileage, except I’d only be getting 20% of the value of his BMW for my old car. Another interesting number, is that he bought this 2004 BMW 3-Series at virtually the cost, as the BMW dealership he works at was selling it for $6,900 retail.

SO, I BOUGHT A BIMMER

My desire for driving a fancy luxury car finally came true. In the last 18 months I worked hard at eliminating my debt, and now that I’m virtually consumer debt free it felt like the right time to finance a new used vehicle. More importantly, the car purchase felt right in my present life, and I’m excited to see what the future holds for me. The whole buying process took me roughly 3 months, which can be broken down into research, comparison, car shopping and preparing to take on a car payment for the next 48 months at minimum.

I expect this post will generate a lot of debate, and that’s cool. My goal with my car buying guide is to offer you something to take out from my car buying journey. Buying a used car is NOT the only way to go. It’s absolutely not. Buying a new car can be a smart choice if you pick the right car, negotiate extremely well, and get a really good financing rate.  I been driving my new used car for the past month, and love every moment of it. I definitely made the right choice, and if I had to do it over again I’d still buy this car. Buying a car is probably the second biggest purchase you’ll make in your life (after your home, and you definitely want to do it right.

Readers, how do you decide when to buy a new car or keep your old one and fix? 

Eddie