Buying a new car is expensive and the process is stressful. Expert tips and advice for budgeting, securing financing, trading in your old vehicle and more in CanadaIllustration by Melanie Lambrick
There’s no easy way to buy a new car. They’re expensive, and the process is stressful and time-consuming. The good news is there have never been more resources available to help buyers make informed decisions. A wealth of price guides, dealership inventories, reviews and consumer advocates are mere clicks away.
To get the best value from your purchase, you’ll also want to keep a sharp eye on the financial considerations. Let’s get started.
How to budget for a new car
For many people, buying a car – new or used – is one of the largest purchases they’ll make in their lives, probably second only to buying a home. And while new car owners will avoid repair costs for several years, they pay a high price for their peace of mind.
So, one of the first steps in shopping for a new car is figuring out your budget. Financial planners and industry experts say vehicle ownership should typically account for between 10 per cent and 15 per cent of your monthly income. This is a good rule of thumb, though it will vary depending on factors such as your income, other monthly financial obligations, and whether you’ll be sharing vehicle costs with a partner.
The important point to remember is that your budget should include more than the monthly payment. You’ll want to account for costs such as insurance, fuel and maintenance.
Cody Green, an industry veteran and founder of online car dealer CanadaDrives.ca, frames the how-to of budgeting as a simple hierarchy. Starting at the top are the mandatory monthly costs – your payment and insurance premiums. You can’t drive without them.
Fuel efficiency comes second, which Mr. Green links to choosing the right car to meet your needs. “Do you need a big truck that’s going to chug the fuel, or can you get away with something that’s more efficient,” he asks. (Natural Resources Canada’s fuel consumption ratings database is chock full of detailed information on fuel economy for new and used cars.)
The final tier is repair and maintenance. Repairs are not an immediate concern, as new cars come with warranties, typically a three-year comprehensive warranty and a five-year warranty on the powertrain. You can also investigate extended warranties for longer-term coverage, if that’s important to you.
You will, however, want to consider routine maintenance costs. The frequency of smaller costs such as oil changes, for example, depend on how much you drive. The Canadian Automobile Association recommends a change every 5,000 kilometres or every three months. Other expenses, such as replacing tires, depend on how you drive. “You could have tires that last multiple years,” Mr. Green says. “If you’re a road warrior, you could be turning them over pretty quickly.”
Is leasing an alternative to the high cost of buying a new car?
Vehicle prices soared during the COVID-19 pandemic as manufacturers struggled with supply chain chaos and microchip shortages. According to AutoTrader.ca, the average price for a new car in Canada surged 17 per cent between the summers of 2021 and 2022, topping out at $55,000.
The rising prices only exacerbated the growing trend in Canada to push vehicle financing to increasingly longer terms. Traditionally, the sweet spot for a car loan term was four years, long enough to make payments manageable while paying off the vehicle before repair costs become an issue. But the high cost of buying has driven those terms to seven years or more, well into the zone when you should start to budget for replacing car parts.
Does leasing a new car make financial sense?
It depends. Car leases are basically long-term rental agreements. You get to drive the car for a fixed number of years, usually two to four. When the time is up, you return the vehicle – no strings attached, provided it’s in good condition and hasn’t been driven more than an agreed number of kilometres.
The advantage is that lease payments are generally less expensive than loan payments on a purchase. The downside is that, if you keep leasing cars, you’ll never get out from under a payment schedule. Nor will you retain any value overtime. Unlike a car you own, you can’t sell or trade-in a leased car.
Overall, ownership delivers greater value in the long term. But there are cases where leasing makes sense. For Shari Prymak, senior consultant with CarHelpCanada.com, a non-profit organization that helps people negotiate vehicle purchases, the decision comes down to whether you are “a short-term person or a long-term person.”
“If you’re a short-term person, you cycle through cars every few years. You don’t want to deal with repairs,” he says. Or maybe you’re a business owner and can deduct lease expenses on your taxes. “If any of those apply to you, then leasing is good.”
Should you trade in your old car or sell it privately?
If your vehicle is in good condition and has reasonable mileage for its age, your dealer will probably buy it from you and deduct the amount from the purchase price of your new car.
Better yet, you’ll only pay sales tax for your new car on the balance after the trade-in – the part that’s paid for with actual money. Say you’ve chosen a new car that costs $50,000. Your dealer offers you a $10,000 trade-in on your old car, which you accept. The cash cost of the new car is now $40,000, which is the only portion of the sale that will be subject to sales tax. Depending on your province, you’ll save an additional $500 to $1,500.
Now for the caveat. A dealer won’t give you the best price for your old car. They need to hold back something to cover their costs of selling the vehicle and making a profit.
The alternative to a trade-in is to sell your old car privately. The obvious advantage is that you’ll probably get a better price. The downside? If you are replacing it with a new car, you’ll have to pay the full sales tax on your purchase. Plus, you’re stuck with the work of advertising the sale and providing transparent information about the vehicle’s condition, such as maintenance reports and, perhaps, a vehicle history from an organization such as Carfax Canada.
You may also have to sift through low-ballers and tire-kickers to find a motivated buyer. Still, getting your best price can be worth the time and effort.
Whichever route you choose – a trade-in or a private sale – do your homework. The internet is thick with used car websites that will show you the going price range for cars of your make, model, year and condition. That helps ensure you get a fair price on a trade-in or the best deal on a private sale.
Sites including AutoTrader.ca, CanadaDrives.ca and GoAuto.ca are popular destinations, but far from your only options. Be sure to check local dealerships and online listings, as well. You want to be up to date on local market conditions.
Dealers vs. banks: Who offers the best new car financing?
In many cases, a dealership will give you the best terms on a new car loan. The reason: They’re in the business of selling cars and often have access to finance companies owned by car manufacturers or arrangements with various banks.
That means they can often offer competitive rates and, sometimes, special rates aimed at increasing sales. “You could look at it as sort of artificially incentivizing their own rates in a way that a bank never would,” says J.D. Ney, director of market research firm J.D. Power’s automotive practice for Canada. Dealerships may also be willing to negotiate, especially if a competitor is offering better terms.
Still, you need to shop around. The best offers from dealerships may be limited to specific promotions or come with conditions, such as a larger down payment than you can afford. In that case, your bank or credit union may be the way to go.
Moreover, a bank or credit union can preapprove your car loan, which helps with budgeting. If you have a good relationship with the lender, you may qualify for a preferred rate or other goodies, such as a discount card for gas purchases or the opportunity to postpone a payment or two without penalty.
Here’s one last benefit: While a bank or credit union may have more stringent lending requirements than a dealership, you’re not dealing with someone who’s trying to sell you a car. That can take a lot of stress out of the financing process.
How to buy a new car: The bottom line
Buying a car – new or used – is an emotional experience. To make the most of the process, start with an honest assessment of what you need from your vehicle before you start researching makes and models. How will you drive the car? If you’re commuting and running weekend errands, you’ll probably want to focus on fuel efficiency. If you expect to be hauling cargo or lots of people, size may trump other considerations. And watch out for unnecessary extras, such as a sunroof or other nice-to-haves. The costs can add up quickly.
Most of all, focus on your longer-term needs and expectations. Three years down the road, you don’t want to be struggling to fit the twins’ car seats into that sporty coupe with a sweet financing deal you saw last week.
When you get to the dealership, also be sure to ask for all-in pricing on the vehicle you’re considering. In addition to the cost of the car, you’ll need to pay mandatory fees, such as freight and predelivery inspection, as well as licensing fees and relevant taxes.
Ask your dealer to e-mail you the full cost of your purchase before you sit down to finalize the sales agreement. A less-than-scrupulous operator may tack on extra fees during the final stage of the sale to increase their margin – things like an “administration fee” or a charge for filling up the car’s tires with nitrogen (which maintains tire pressure longer). Having a quote in writing gives you a tool to push back.
Finally, remember that it’s okay to walk away, even when you’re close to making a deal. “Don’t go into a dealership deciding that you have to buy a car today,” CanadaDrives’ Mr. Green advises. “Some people feel pressured. … The salesperson has spent three hours with them. [You may] feel like you need to buy a vehicle. You don’t. That’s their job.”