The first principle in buying a car is, save up your mon ey and buy a car that you can afford. If you finance the car there are some serious pitfalls to consider. Firstly, the car will deprecate faster than you pay it off and second, the interest rate that you are going to be paying on the loan to buy the car is going to add substantially to the total price of the car.
Buying a Car with Imperfect Credit
October 15th, 2015 by A Licensed Insolvency Trustee
The first principle in buying a car is, save up your money and buy a car that you can afford. If you finance the car there are some serious pitfalls to consider. Firstly, the car will deprecate faster than you pay it off and second, the interest rate that you are going to be paying on the loan to buy the car is going to add substantially to the total price of the car.
If paying cash is not a practical option, as is often the case, then the use of credit may be necessitated – but be careful.
Not all car retailers are equal. Some will charge a reasonable rate of interest on a car loan. Others may view you as a higher credit risk and may charge 15 % – 35% interest. Where other retailers will charge you a reasonable interest rate but will charge you twice as much as the car is worth. Be leery of retailers who want to take security on all of our assets (even a second mortgage on your house) as well as personal guarantees from relatives. Well there are many dealers with questionable ethics there are still some dealerships that are very straight forward. They may offer 0% financing over a number of years, and this can be a good thing (if you qualify). These types of offers are usually loaned to new car purchase but there continues to be a debate over if one should buy new or used.
In buying a new car one can get a warranty which can alleviate surprise repairs and who doesn’t like the “new car smell”. The downside is that the vast majority of depreciation of a motor vehicle takes place in the first 2 or 3 years. When buying a used car you can avoid a lot of the depreciation but there may be surprise repair bills as the car gets older.
Before you actually go out and cut the deal with the dealership you may want to take a serious look at how much credit you actually qualify for (your credit rating). You can order periodical reports from the credit reporting agencies and you can also talk to your local bank or credit union to see if you qualify for a bank loan. Knowing how much money the bank might loan you to buy a car will help you considerably in focusing on the kind of car you can afford. If you have a poor credit rating, it means that the lender doesn’t think that you are going to be in a position to pay back the loan. You may want to reconsider buying the car or look for one that is more affordable. If the lender or the financial company at the dealerships is charging you 35.8% interest or some such figure or wants a mortgage on your house, think twice about entering into the deal.
If you insist on buying that shiny new car to impress your friends remember, they won’t be terribly impressed when it gets repossessed.
But what if your job depends on having a car – what do you do?
A brand new car can be a practical investment if you keep it well maintained and spread the initial cost of the car over several years i.e. the life of the car. The problem is that the initial cash investment is large and the benefits are not recovered for several years. A better bet might be to buy a good used car, even one that is only 3 or 4 years old will have a substantial amount of depreciation already accrued such that the capital layout is considerably less. Again, good regular maintenance will preserve the value of the car for many years.
For most people a car is not a luxury as much as a necessity. Public transportation is not available in all areas, even some urban areas. The weather conditions in most of Canada are severe and prohibit modes of transportation that are better suited to summer time.
In summation, prepare a proper budget so you know how much you can afford to spend on a car, look for appropriate financing and avoid the many dubious lenders in the car business and remember to take care of your assets.