How to buy a car without getting swindled

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Money 123: How to buy a car without plunging into debt
WATCH: Summer is the busiest season for buying a car. But how do you purchase a vehicle without getting trapped into a perpetual debt cycle? On this edition of Money 1-2-3, online reporter Erica Alini looks at financing that fits your budget – Jul 20, 2019

Perhaps you’re a car enthusiast, one of those people who gaze at all shiny new vehicles with stars in their eyes, but also one of those who tend to blow far too much cash on the dealership floor.

Or maybe that’s not you at all. You just want something that will do the job and not break the bank — but you’re worried about buying a lemon.

Either way, purchasing a vehicle is a treacherous process, one in which you’ll likely encounter incomplete information and aggressive sales pitches. It’s easy to make a mistake. But a car is likely to be one of the most expensive things you’ll ever buy. And even after you’ve driven it off the lot, gas, insurance, maintenance, and repairs — not to mention depreciation — will make it one of the major drains on your wallet.

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Here’s how to make sure you get it right:

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Choose the kind of vehicle you really need

Step one is figuring out what kind of car you need. That seems straightforward enough: if you have a big family, you’ll probably want a minivan or an SUV with third-row seating. If you own a boat, you might want to go for something with the appropriate towing capacity.

But things aren’t so simple, said Kristine D’Arbelles of the Canadian Automobile Association (CAA). It’s easy to trick yourself into thinking you should get a bigger vehicle than what you actually need.

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For example, if that boat of yours is getting out just two or three times a year, you may be better off just renting a pick-up truck for the occasional outing and buying a smaller vehicle that suits your needs the rest of the year, D’Arbelles said.

The same goes for that third row of seats if they’re only going to be used to haul around the in-laws when they fly in for the holidays.

“Canadians like to buy big cars,” D’Arbelles said, but often don’t realize how much more expensive a bigger vehicle can be.

The costs can go well beyond the sticker price: you might also be looking at spending more on gas, maintenance, and insurance.

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For example, here’s the estimated annual cost of driving a compact SUV like the Ford Escape compared to the bigger Ford Explorer, according to the CAA’s driving costs calculator:

What can you afford?

Step two is setting your budget so you can narrow down your search to a few models that fit both your needs and your finances. You’ll want to take a look at your savings to see what kind of down payment you can come up with and use that to calculate your monthly payments. Be sure to include sales taxes in your calculation.

You should also compare ongoing vehicle ownership costs like gas, maintenance, and insurance.

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New or used?

If your budget is tight, you may have no choice but to go for a pre-owned vehicle. However, if you have some financial wiggle room, how do you choose whether to buy a new or used car?

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It’s hard to give a blanket answer, said George Iny, executive director of the Automobile Protection Association. But the biggest danger when buying a new car is ending up with negative equity, meaning that you end up owing more on your car loan than your vehicle is worth, he added.

When you trade in a car you haven’t fully paid off, for example, your old car loan will be rolled into a new one.

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“Sometimes the payment looks lower than that for your current vehicle so you figure, ‘Why wouldn’t I drive a brand new vehicle for less money?’ But it’s not less money,” Iny said.

Your payment is lower because the length of your loan term has been extended.

“Over time, you’ve just taken on $30,000 to $35,000 of new debt,” Iny said. “A lot of people seem to be strangely unaware of that — and dealers encourage it.”

A gently used vehicle — one that’s only a few years old and doesn’t have too many kilometres on it — can be a very good deal. After all, a new vehicle can lose more than 20 per cent of its value after the first year of ownership, according to Carfax. That’s a big discount for used-car buyers.

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On the other hand, you won’t be able to find zero per cent financing on a used vehicle, Iny said. Your dealer will charge you at least five or six per cent in interest on a loan to finance a used vehicle, he added.

That will reduce the price advantage of buying a used vehicle, Iny warned.

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How to research car models

Once you have a list of candidates for your car purchase, it’s time to do some research. Two well-known sources of unbiased information on this are the U.S.’s Consumer Reports and Canada’s Lemon Aid guide, whose 2018 edition was co-authored by Iny along with Phil Edmonston.

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Most vehicle reviews you see online, on the other hand, should be taken with a pinch of salt, Iny said.

“Journalists have no access to information on reliability. So when they say something reliable, they may be right or they may not be,” he said.

But if you’re trying to estimate maintenance costs, remember that how likely a car is to break down is only part of the story, D’Arbelles said. The other part is the likely cost of the repairs themselves.

Higher end, more complicated and less popular cars generally come with higher maintenance costs given comparable reliability, she noted.

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Things to know before buying a used car 

If you’ve made up your mind to buy used, you’ll have to do a bit more research work. In addition to reading up on the models you’re considering, you’ll have to investigate the condition of the particular vehicle you’re looking at.

If you’re buying from a dealer, certified pre-owned (CPO) vehicles come with a price premium but also the peace of mind of knowing your car has undergone a detailed inspection and comes with an extended warranty. Still, what a CPO program entails varies by manufacturer, so make sure to read the fine print and know what’s covered and what isn’t.

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If you’re looking for a gently used ride that will last 10 years or more, Iny suggests looking at vehicles that are three to four years old.

“At year three, that’s when the lease returns start to come in,” he said.

With cars younger than that you may want to tread cautiously. Many are daily rentals for which you won’t be able to get an accurate history because rental companies don’t have to report damages to their own vehicles, according to Iny. In other words, a clean Carfax report on a former rental doesn’t tell you much, he added.

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Still, rentals can be a good buy, he said. Just make sure to have the retailer put down in writing that all panels and paint are original, Iny suggested.

“At least you’ll have something … that corroborates what you’ve been told verbally,” he said.

If you’re buying from a private owner, ask for the car to be inspected by a mechanic of your choice, D’Arbelles said.

Another thing to consider when buying a used vehicle is how many kilometres it has already travelled, something that may be a more accurate indicator of how much life is left on it than the year of production, Iny said.

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A car with a lot of kilometres would typically sell at a discount and could be a good buy if it has been properly taken care of, Iny said. But beware of vehicles that have logged an exorbitant amount of kilometres in a short time. Those tend to be U.S. imports, Iny said.

“If someone is bringing in a car from the States, where it basically costs more than in Canada — how are they being competitive here? You’ll want to be doubly sure you’ve got a history search on it,” he said.

Always negotiate your price

If you’re buying new, one thing that will help you nail a good deal is timing. Car shopping toward the end of the year tends to net better prices because dealers are eager to get rid of the previous year model stock and more likely to give you a big discount.

If you’re buying used, make sure to look up the average sale price of the particular model you’re considering in a source like the Canadian Black Book, D’Arbelles said. Knowing the history of the vehicles and making your own cursory inspection of at least the exterior and interior of it — taking notes as you go — may help you haggle. If you see a ding or a scratch, don’t be afraid to ask for a few hundred dollars off the asking price, she said.

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Finally, if you’re looking for a vehicle that will fit a budget of just a few thousand dollars, you’re likely better off buying from a private owner rather than a dealer, Iny said.

“Dealers need to make at least $1,500 to $2,000 in profit off the sale of a used car,” he said. And while that’s completely reasonable when you’re paying $20,000 for a vehicle, it becomes a hefty markup when the car is worth just $5,000.

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