By Michael Smele
With the economic downturn of 2008, a lot of Canadians have put off purchasing that new car, seeing it as a big ticket item. The times, they are a changing. In fact auto loans are the fastest growing debt category out there. You may just be one of those eyeing that shiny new machine with low finance rates advertised right now. But just because you qualify at the dealership’s in house loan facility, doesn’t mean it is the best option for your bottom line.
Auto Loan vs Home Equity
There are advantages and disadvantages to either method of acquiring that new ride. The overall factor for both is that you will be able to afford the payment without putting yourself into a difficult financial position. The concern with your standard dealership or typical used car third party financing company is that the payments and interest rates are generally still surprisingly high. Coupled with a Canadian population that is already carrying high consumer debt and it becomes more important than ever to consider how you are going to pay for the vehicle. This is before you sign the dotted line with your dealer.
Can I Afford My Car Payment?
This is now pretty much the only consideration of the consumer today. Gone are the days where the sticker price of the car was predominately displayed on the windshield. Now it is the bi-weekly payment to line up with your pay cheque. What concerns me is that this leads to purchasing a car that you really can’t afford. If your maximum monthly payment is $500 and you have used up that whole borrowing amount, you have left yourself with no room in case of a life event. I encourage my clients to go through this exercise and see what they can afford and then explore the options available to reduce the monthly payment amount, leaving breathing room for that unexpected expense.
My House Bought My Car!
One strategy that has been very successful for a surprising amount of my clients has been using a second mortgage to purchase the new car outright. Now before you balk at the thought let me explain. A lot of Canadians have a killer first mortgage that they wouldn’t touch for the moon! This is great… we should be leaving this debt alone and let it play out its course. But did you know that there are lenders out there offering second mortgages for as low as 3.39% as of this writing? What is so tremendous about this is that the low interest rate stays with you for the life of the loan and you have fixed payments ensuring a super low monthly payment. This in contrast to the more traditional way of purchasing with home equity of a line of credit where a variable interest rate can come back to bite you if and when interest rates rise.
Drive Smart in Brampton
We must never forget that a car loan must be of function first in that the vehicle is taking us to a place where we make the money to pay for it and more. An interesting factor to remember is that just an extra $300-500 would make the difference in those who file for bankruptcy (or a payment less this amount). If you are going to purchase or finance a new car regardless of the words you read here, just make sure that you will be able to afford the payments, or have a strategy to pay off the loan without putting yourself into hot water.
Using your home equity to purchase a new vehicle is a viable option in acquiring the machine you want without leaving yourself in a tight place along the way. I will do my utmost to look at the vehicle loan as part of your overall financial picture and we can create a strategy that will work for you while enjoying the thrill of your new ride.