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The do's and don'ts of buying a new car

For many Canadians, buying a car is a necessity. Unless you live in a densely populated area with amazing public transit, a car is an important time-saving tool. And if you live in a rural area, it might be the only way to get around.

Should owning one become a requirement, or your old jalopy is failing, here’s how to buy a car.

If you’re like most Canadians, transportation is the second-largest non-tax expense in your household. So, if you’re buying a new car, a little savings can go a long way. Let’s look at how to save money when buying a car.

Do your homework

When looking for a new car, first sit down with a calm and clear mind and make some decisions about what you need and what you want.

I want a brand-new Tesla Model X Performance, MSRP $142,090. I need a safe and reliable car that’s big enough for my family and all our stuff. It should get me to the grocery store and train station, and that’s not going to break the bank when it comes to payments, fuel or car insurance.

Before you make a decision about what kind of car you will buy, think about how you will regularly use it. For example, you might want a large pickup truck with towing capability. If you’re pulling a trailer for work daily, that’s probably a good idea. If you’re only pulling a camper for one week in the summer, you can probably save money by purchasing a smaller vehicle and renting a pickup truck when you need one. The price difference between a modestly equipped Ford F-150 and a Ford Escape crossover with similar features is almost $5,000 – that’s no small amount.

By being realistic about what you actually need in a car and making rational decisions, you can potentially save a considerable amount of money before you even start shopping.

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Consider the true cost of owning a vehicle

Most car buyers focus on the monthly payment. But there are four major contributors to the cost of ownership that are better indicators of how your car will affect your long-term wealth. Once you know what you need in a vehicle, you can narrow your search by focusing on these cost drivers:

Price factors in buying a new car

  1. Depreciation. While your loan payment affects your cash flow, the actual cost of owning a car comes in the form of depreciation. It’s well documented that a new car will lose around 30-40% of its value in the first year alone. That means a $30,000 car will cost you up to $12,000 in the first year just because its value diminishes so quickly.
  2. Interest. This is the amount of interest you’ll pay on your car loan. If you take out a $30,000 car loan for 5 years at 2.99%, you’ll pay $2,335 in interest.
  3. Insurance. Carrying third-party liability insurance is a requirement across the country. If you take out a loan or lease your car, the lender will insist that you get car insurance with collision and comprehensive coverage as well. Your premiums are based on where you live, your driving history, how much you drive, the make and model of your vehicle, and the amount of coverage you purchase. It’s not uncommon for drivers in BC and Ontario to pay $150 or more per month on car insurance.
  4. Fuel & maintenance. Gasoline plays an essential role in the internal combustion engine. So does engine oil. Brake pads are necessary for those who like to be able to stop. According to CAA, routine maintenance costs car owners an average of $500-700 per year, not including repairs and non-routine maintenance like new tires.

Worrying about the monthly payment alone disguises the actual cost of owning a car. Armed with this information about where your money actually goes when you purchase a vehicle, you have some options to contemplate.

Consider not buying a new car

Having a shiny new car to show off is appealing, but the best way to save money on a new car is to not buy one. In most cases, the logical decision is to keep driving your existing vehicle.

Even if your older car is costing you a few hundred dollars a month for repairs, it’s still probably less costly than a new car would be. Depreciation is no longer an issue most as cars have lost around 70% of their value after five years and are virtually worthless after ten. Interest is out of the equation after the loan is paid off. And insurance is often cheaper for older cars because you can remove unnecessary coverage.

A new $30,000 car will cost you $1,200 per month in the first year on interest and depreciation alone. Even if your older car needs significant work, you will likely still come out ahead by hanging on to it.

Read our blog,“Do I need collision insurance on an older car?”

Buy used instead of new

There’s something to be said for reliability, however, and sometimes it’s worth spending a little more to have a car that’s in good shape (and under warranty).

Dealers like to use fancy math to trick car buyers into thinking a new car is a better deal than a used one. They’ll show you the payment on a new car and compare it with the payment on a similar used one. The used car will have a shorter loan term and higher interest rate, making it look unattractive next to the new one.

Shrewd car buyers know that the monthly payment, while important, has more to do with cash flow than the actual cost of the vehicle. A two-year-old car, already having taken the brunt of its total depreciation, will cost far less over its lifetime even though the payments may be similar to those for a new car.

A brand new $30,000 car with a 2.99% loan will cost you around $23,000 in depreciation and interest over the first five years. The same car purchased two years later with a 9.99% loan will cost approximately $17,000 in interest and depreciation over the first five years. That’s an average of $100 per month in savings for choosing a late model used car over a new one.

Visit’s car buying guide: How to buy a car

When buying new, make dealers compete for your business

If you’re set on buying a new car, one of the best ways to get a deal is to treat it as a commodity and force dealers to compete for your business.

A litre of fuel is pretty much the same no matter where you buy it, so most drivers choose which gas station to visit based on price.

The same is true for cars.

Car dealers make money a lot of different ways. Still, their biggest paydays come in the form of volume incentives from the manufacturer. The more vehicles a dealer can sell in a month, the bigger their bonus will be. Some dealers have made it their business model to sell a high volume of cars at low margins to cash in on these incentives. Even more than buying a car at the end of the month, finding a dealer that’s in it for sales volume can get you a deal.

To make this work, you need to be extremely clear on exactly what it is you want. Once you’ve done all your researching, test driving, and tire kicking, you should know every detail about the exact vehicle you want to buy. You should know the make, model, trim, year, colour and specific options. Understand the parameters of your financing, including your trade-in (if applicable), down payment, whether you want to make monthly, bi-weekly, or weekly payments, and the length of the loan you want.

When you know precisely what you want and how you want to pay for it, it’s time to call every dealer you’re willing to drive to. The last time I bought a new vehicle, I contacted six different dealers in my area and asked for their best price on the exact car I wanted. Most of their quotes were within a range of about $1,000. And one came in about $5,000 lower than their next-closest competitor.

Read our blog, “How to negotiate a new car

When buying a new car, make your offer conditional

When you make an offer to buy a home, it’s wise to make your offer conditional on a few things. Most homebuyers want a satisfactory inspection and a chance to secure financing.

There’s nothing to stop you from making your next offer to buy a vehicle conditional as well. Use this as an opportunity to weed out any “gotcha” charges that may be built into the price of the car. Consider making your offer conditional on:

  • Inclusion of all taxes and fees in the price. There’s nothing worse than shaking hands on a new car purchase only to find out that the $1,500 PDI charge wasn’t included.
  • Satisfactory mechanical inspection. Especially if you’re buying a used car from a private seller, you will want to have an expert look under the hood.
  • An extra or two. When dealers can’t budge on price, they can sometimes budge on other things. Asking for a spare key, detailing, or even a year of free oil changes is a great way to squeeze more juice from the lemon.
  • A full tank of gas on delivery. You’re forking over thousands of dollars. It’s the least they could do.

Even if you don’t get what you want, using these conditions gives you some means of negotiation beyond just money. As the old saying goes, the surest sign of a good deal is when both sides feel like they got screwed.

Are you paying the best price for car insurance?

In less than five minutes, you can compare multiple car insurance quotes from Canada's top providers, free of charge.

Keep your cash flow under control

Most people prefer to look just at the monthly payment when shopping for a car. But the size of your payment isn’t necessarily correlated with the cost of owning your car. Your monthly cash flow is just as important as long-term savings for most family budgets. If a lower monthly payment is what you’re after, consider the following:

  • Save up a bigger down payment. For most Canadians, paying cash for a car is not an option. If you can’t save up the total purchase price of a car, a more significant down payment is one of the most effective ways to reduce your monthly car payments. On a $30,000 car financed at 2.99% over five years, a 20% down payment of $6,000 will lower your monthly payment by $108 compared to the same purchase with no down payment.
  • Compare car insurance before you buy. The make and model of your vehicle can have a significant impact on your car insurance premiums. Before you decide on the car you want, compare car insurance online and see how different vehicles will affect your insurance costs. You might find that a vehicle with a higher monthly payment will cost you less overall because the insurance is cheaper.
  • Check your credit score and make improvements if needed. If your credit needs work, you might be limited to car loans with unreasonable terms and high-interest rates. Before you start car shopping, check your credit score to make sure you’re in good shape. If your credit score is below 680, improve it. You can do so by paying all your bills on time and reducing credit card balances.

Read our blog, “TCO – Total cost of ownership

Sell your old car yourself

Dealers have a lot of different ways to manipulate the sale price of a car. One of the most famous of which is to pretend like you’re getting a high price for your trade in.  The reality, however, is the money is coming from a discount that’s already available on the car. If you’re genuinely motivated to save money, you can get far more for your car by selling it privately rather than trading it in.

The trade-off in selling your car privately, of course, is the investment of your time. Selling a car takes a lot of effort, and it might not be worth it for a couple thousand dollars.

I’ve tried to buy a used car privately in the past. I was utterly frustrated by the futility of the endeavour. I implore you, please take this advice and catapult yourself into the top percentile of competency among car sellers.

Tips when selling your own car

  • Keep the plates on. A test drive is a crucial step in buying a car. Keep your car plated, insured and driveable until it’s sold.
  • Clean the car. Dog hair, cigarette butts and fast-food wrappers are not on most people’s shopping list. A few hundred dollars for detailing will pay dividends.
  • Get it certified. Some jurisdictions require used cars to be safety certified and/or emissions tested before the new owner can drive them. Buyers will pay a premium (and choose your car over the competition) to avoid having to do this themselves.
  • Take decent pictures. Lots of them. Look at car dealer websites for inspiration. Prospective buyers will see the dents eventually. So, save everyone time by putting the whole car on the record upfront.
  • Know what the car is worth. In an experiment conducted at Cornell University, the economists Daniel Kahneman, Jack Knetsch and Richard Thaler found that people generally value items they own far higher than items they do not own. Thaler called this the endowment effect, and it’s embodied by car sellers everywhere. Chances are your car is not unique, and the repairs you just made to it are a sunk cost that did not increase its value by even a dollar. There are lots of resources for valuing used cars. Know what the car is worth and price it accordingly.  Try not to get caught up in any fantasies of getting $10,000 for your 2008 Honda Civic.

The bottom line

There are lots of ways to save money when it comes to buying a car. Savvy buyers are aware of two things: their actual, real-world needs in a vehicle, and the overall cost of ownership.

The best way to save money on a vehicle is to resist the urge to buy the car you want, and instead, buy the car you need. By foregoing unnecessary features (I, for one, will never pay extra for built-in navigation again) and disregarding fantastical and infrequent use cases, you may be able to translate that discipline into thousands of dollars in savings.

The next-best way to save money on a car is considering how depreciation, interest, auto insurance, fuel and maintenance all contribute to the overall cost of owning a car. Choosing to repair your old car or buying a used one may not look like money-saving options on their face, but they are proven to be better for your long-term wealth than buying new.

First time car buyers have lots of smoke and many mirrors in which to navigate. Stay focused on your needs and make smart financial decisions. Knowing where your money goes when you buy a car, helps you take the rest to the bank.