The real cost of owning a car

Cars can be wonderful things to have, but many Canadians may not understand exactly how much it costs to drive and maintain them.

Cars can be wonderful things to have, but many Canadians may not understand exactly how much it costs to drive and maintain them.

The Canadian Automobile Association estimates the cost to own and operate a 2009 Chevrolet Cobalt is $17.85 a day or $6,516 a year. To get behind a 2009 Dodge Grand Caravan, you can expect to pay about $23.63 a day, or $8,625 a year.

Included in the cost are such things as maintenance, fuel, tires, insurance, license fees and registration, depreciation and financing.

“Many of us underestimate the day-to-day costs of vehicle ownership,” said Tim Shearman, CAA president.

“With the recent economic struggles that many Canadians are facing, it’s important for consumers to have a better understanding of their large-scale costs so that they can figure out ways to save hard-earned cash.”

A car is a large purchase for most people. Unlike real estate or some other investments, it’s an asset that in most cases depreciates over time.

If you’re thinking about buying a car, it helps to know some of the options available to you.

According to the Investor Education Fund (IEF) there are basically four ways to pay for a car.

The first is cash. This is probably the most preferable way to pay for the privilege of driving, but probably the least accessible for the majority of people. Most people simply don’t have the cash you need to purchase a new car these days.

Most people put a down payment on the car and then finance the rest, either through a bank loan or through a finance plan offered by the car dealer.

When you buy a car you can ask the dealer to arrange a loan for you. But ask for the details. Dealer financing plans can cost more than bank loans, unless they’re offering special deals.

Car dealerships will sometimes advertise special deals such as zero per cent financing or low rates on selected models. Sometimes these deals are real, sometimes not.

Manufacturers often offer low rates to help dealers sell models that are not selling or to gain market share of a particular brand or type of vehicle.

Only about 20 per cent of car buyers actually qualify for low financing, the IEF says. You must have a good credit report and a high credit score.

Sometimes the term of the loan is shorter than usual. Most car loans are four or five years, but a special deal might be for only two. Because you have to pay back the loan faster, you will pay less interest but much higher monthly payments.

You may or may not get a better interest rate from a dealer compared to a bank. Before you decide which option to take, shop around.

Leasing is another option.

There are many reasons people lease. For some, it’s the lower monthly payments while for others it’s because they don’t like to pay cash for something that immediately drops about 20 per cent in value as soon as they drive it off the lot.

With leasing, you pay for the use of the car over a set period of time, usually three or four years. You don’t pay the full price of the car, which is why your monthly payments are lower than if you buy.

However, there are some conditions attached.

You can’t give the car back in the middle of the lease without penalties. There’s usually a limit on how many kilometres you can drive during the period of the lease, and if you go over that limit, you could pay another big penalty.

You have to maintain the car and could pay penalties for any damage to it when it is returned.

Leasing can make a lot of sense for some people, including those who work for themselves. Some of the advantages include no down payment, lower monthly payments, no major repair bills and tax deductions. You may be able to deduct some or all of your monthly lease payment off your business income.

“Leasing has become a popular way for people to finance their vehicles,” said IEF president Tom Hamza. “However, it’s not right for everyone. Before you decide, check with your accountant to understand the tax rules for your situation.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

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