Best bang for your car buck

Financial planner Jason Heath answers readers’ financial questions with the aim of helping show the true cost of everyday decision-making. Email queries to personalfinance@ nationalpost.com.

Audrey asks I have been thinking about buying or leasing a new car to replace my 2000 Honda Accord V6. It has about 150,000 kilometres and while it has many dents, it’s in very good mechanical condition and is quite reliable. Should I keep using my current car until I run into major expenses, buy a new car with low-interest financing or lease a new car? It’s generally a better financial decision to repair a car versus getting a new one. I don’t like the logic that if it costs you $4,000 to repair a car that might only be worth $3,000, you should get a new car. The financial and non-financial “costs” of getting even another $3,000 car might not be far off the $1,000 difference.

I much prefer an alternative approach: If you’re spending $4,000 a year on an older car, it would be tough to find a monthly payment on a new car under $333 a month, or $4,000 a year, or a $20,000 car that wouldn’t depreciate by 20% or $4,000 in the first year (with no down payment or increase in your insurance). I think $4,000 in annual repairs is about the break-even point financially.

If the frequent repairs are inconvenient, or you just flat out want a new car, that’s a whole different thing. The all-in costs on a new-car purchase are generally going to be better if you buy, whether with cash or with your own financing. Financing costs can be deceiving, because if you just automatically opt for the 0.9% financing because that’s cheaper than your line of credit or because you can earn a better return on your TFSA with your eyes closed, you could be missing an opportunity.

Everyone from top to bottom, whether you’re the chief excutive of a car company or a rookie salesperson, has to pay more than 0% interest themselves, so why offer 0% financing to you? Because the interest is already built into the price. Don’t be surprised if you can buy a $25,000 car with 0.9% financing for $21,000 by writing a cheque from your chequing account or line of credit. The savings in this example would be about 3.8% additional annual interest — the “invisible” financing costs.

A lease tends to be a better lifestyle choice than a financial one, because you don’t have to worry about much other than going over on your kilometre limit or having too many dents at the end of the term. You can just opt for a new car and a new lease and a fresh set of wheels every few years.

For those looking for the best bang for their car buck, the best advice I’ve heard is to “never buy new” and “never sell used.” People will irrationally spend more for a new car and likewise will irrationally value less a used car. The best way for you to exploit human irrationality is to buy a lightly used car and drive it into the ground.