Establish your beacons!
There is a basic rule that allows you to establish the maximum amount that you can invest in a monthly payment for the purchase or lease of a motor vehicle. This simple rule is part of the recommendations of financial experts: the monthly payment should not exceed 20% of your other living expenses such as rent, energy expenses, and bills from other utility companies such as telephone and cable, groceries, credit cards, and other recurring expenses. But beware! Because the more expenses you have, the less you have left to make your car payment.
Interest rates: an important factor
Whether you decide to buy your vehicle or lease it, there is a principle to consider: the short term imposes lower rates than the long term. For example, a manufacturer who offers you a lease for 36 months at 4.59%, could just as well offer you a term of 39 months at 5.99% or a term of 48 months at 6.59%. Moreover, if, for your future creditor, you are a borrower at risk, there is a good chance that your interest rate will be higher than that of a borrower deemed creditworthy.
Longer amortization periods
In recent years, there has been a tendency to finance loans for a motor vehicle over longer and longer periods. If twenty years ago, financial institutions lent for periods of three or four years, today they do not hesitate to offer loans repayable in five, six, and even seven years. Firstly because vehicle prices have increased, but also because vehicles are more reliable and durable.
Rent or buy?
In recent years, for a host of reasons, consumers have moved away from buying and towards renting. What is the difference between both? When you buy, you finance the full cost of the car, including sales taxes, at an interest rate determined by your bank or other financial institution. You then repay this loan in monthly installments over several years. When you lease, you finance your use of the car. You only pay part of the cost of the car, that is, the part corresponding to the use you will make of it during the term of your rental contract. To fully understand the obligations of the merchant as well as those of the consumer, in the case of a purchase or a rental, the Office de la protection du consom mateurdu Québec offers several information documents, as well as the help of its specialists. To find out whether you should buy or rent instead, take a look at the advantages of both formulas:
Advantages of the rental agreement:
- Your monthly payment is lower than that of a loan for the purchase of the same vehicle
- You only pay taxes on your monthly payment and not on the total value of the vehicle
- If you opt for a new vehicle, it is always or almost always under warranty
Advantages of the purchase financing contract:
- It will cost you less to buy if you keep your vehicle for a few years after the end of your loan
- You can drive all the mileage you want without penalty
- You can make all the modifications you want to your vehicle
Is it more expensive to rent or to buy?
In general, a rental entails higher disbursements than a purchase. Your monthly payment is certainly lower than the payment on a loan, but you pay permanently.
When your lease is over, you have to change cars, unless you decide to buy it back, a solution that can sometimes be of significant interest (see the section on residual values). If you renew the rental experience, then you will have another contract with a new monthly payment.
In the case of a purchase, after the last payment, if you decide to keep your vehicle for four additional years, you only pay for maintenance.
The game of residual values
The residual value is of paramount importance when it comes to leasing a vehicle. For example, if you intend to lease your vehicle and return it at the end of the term to lease another one, it would be to your advantage to choose a model with a high residual value (around 50% of the value of the new vehicle ).
On the other hand, a residual value lower than the market value of the vehicle could lead you to buy the vehicle at the end of the lease period, either to keep it or to resell it.
Remember that the residual value is set by actuaries, who analyze market trends. The consumer, therefore, remains dependent on this analysis.
