Get out of my dreams and into my car—once I can afford one. Road warriors and Sunday drivers can agree that buying a car is more expensive and confusing than ever before.
There used to be a good guideline for gauging car affordability—20/4/10. You would put 20% down on a car, finance it over a four-year term, and the monthly payments wouldn’t eat up more than 10-to-15% of your take-home salary.
- But experts are throwing the old rulebook out, urging people to look at their financial situation more broadly before driving off the lot.
Why it’s happening: Getting behind the steering wheel of a new whip has always been pricey, but with production delays and long wait times for new cars driving used vehicle prices up, buying a car has a new set of financial hurdles.
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Longer financing terms. According to the Globe and Mail, the average finance term has grown to 84 months, or seven years, in both car markets.
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Higher monthly payments. The average monthly payment for a seven-year term is $710 monthly for a new car and $700 for a used one.
- Higher interest rates. Also known as the annual percentage rate (APR) in the car world, these rates run between 3.9 and 4.9%.
Why it matters: For many Canadians, a car is a necessity, but the market has changed, and it’s easy for car payments to put your finances in a chokehold—but there are a few ways to make your monthly payments more manageable.
- Scratch together a bigger downpayment to reduce the amount of interest you’ll pay.
- Shop around for financing. Your bank might be able to give you a lower interest rate than a dealership.
- Beware of 0% financing promotions—a missed payment can result in costly fees. Plan to pay off most of the loan, if not all, within the promotional window.
- Carry over debt carefully. Trading in your clunker for a brand-new car is great, but make sure you don’t still owe a significant amount on your first car before buying your second.
- If you live somewhere with car-sharing options (like Communauto in some Ontario, Alberta, Nova Scotia, and Quebec cities), you may be able to get away with not having a personal vehicle
Bottom line: Buying a car is a deeply personal purchase and probably the biggest you’ll make outside of a home, so don’t rush into it. The market is weird right now, so if your 2005 Toyota Corolla still has some life in it, ride it out.