Most Quebecers depend on the automobile. But few of them know the hidden costs of their car although these costs can easily derail your budget. Do you know how much your car really costs?
According to a CAA Québec survey conducted several years ago, 67% of Canadians are unaware of the real costs of owning a vehicle. In this regard, before the pandemic, CAA Québec reported an average annual budget of $11,000 (including purchase or lease, financing, insurance, registration, driver’s license, maintenance, tires, depreciation, gasoline or electricity, and taxes). And that was before the current inflation rates. . .
According to CAA Québec, the average annual cost of gasoline for a compact car in Québec is about $3,300. For an SUV, it comes to $9,000!
Fees that don’t add up
At 18.5% of the total household budget, transportation is the second largest household expenditure in Canada, according to Statistics Canada. Ninety percent of this is allocated to the automobile. From a financial point of view, it doesn’t make sense since, according to most researchers, a car is parked 95% of the time.
It should be noted that a car still represents the largest household debt, after the mortgage. One out of two consumers borrows to purchase a vehicle, 11% with a line of credit.
A good way to learn the true cost of a car is to use CAA Québec’s online calculator. This tool displays the purchase or lease cost for the model of your choice, new or used, based on your annual mileage. It also provides the annual fuel cost.
Watch out for depreciation
Depreciation, the difference between a vehicle’s purchase and resale value, is the aspect most underestimated by consumers, according to Jesse Caron, researcher at CAA Québec.
In the first year, your new vehicle has already lost 30% of its value, and this rises to 50% after three years! So, if you finance your car for more than three years, the balance of your loan is higher than the value of the vehicle. This is called “negative capital,” or “ballooning.” If your vehicle is financed for eight years, you can lose a lot of money if you change your vehicle. Half of Québec owners have cars that are less than five years old. On the other hand, the longer you keep your vehicle, the less it costs you in depreciation. So keeping it for 10 years makes sense.
Some brands depreciate more slowly than others, but we’re talking about a 10% difference at best after four years. Compact pickups are the best at maintaining their value, SUVs and luxury cars depreciate much more quickly.
Regular maintenance can also slightly slow a vehicle’s depreciation rate, by minimizing deterioration (and increasing its resale value). However, at this time, with historically high prices in the used car market, sellers are definitely not as affected by depreciation.
Are there any hidden costs associated with buying or leasing a car? There are many.
For instance, many consumers who prefer to lease face an unexpected and possibly large bill for damage or abnormal wear and tear when they return the vehicle. One way to avoid this is to order an inspection yourself one month prior to delivery, to avoid prohibitive dealer fees. Or buy back the vehicle. The residual value written on the contract is often lower than the market value of a used car! Alternatively, you can purchase excess wear and tear insurance up to a value of 2,500 over and above normal wear and tear, but you will have to add $25 per month to your monthly payment, or $900 after three years.
Another hidden cost is the cash deposit paid at the time of rental, which will lower the monthly payments. In case of theft or accident with total loss, you lose this money. Instead, pay a security deposit up front, which often results in a better rate.
Another disadvantage of leasing is that consumers sometimes exceed the annual mileage stated in the contract, which does not correspond to their actual needs. The penalty is a nasty surprise!
As for buyers of new cars, they are disadvantaged by the global supply chain crisis affecting manufacturers. Dealers often offer a more luxurious version, available immediately, rather than waiting several months for your preferred choice. But do you really need a sunroof and leather seats?
Financing is expensive
Some people believe weekly payments will be just a few dollars higher. Wrong. Avoid this trap as it never reflects the true cost of financing. Especially since you have to multiply the cost by 4.3, not 4, which makes a significant monthly difference.
Long-term loans are becoming increasingly popular. A $30,000 vehicle paid for in five years at 10% will cost $8,244.60 in interest. The Office de la protection du consommateur [consumer protection office] calculates that this amount rises to $10,016.16 for a six-year loan and $11,649.76 for a seven-year loan.
Some dealerships impose mandatory financing in order to offer a good discount. If you can pay off the loan in full at any time without penalty (with another loan at a better rate), it may be worthwhile. But if the cost of financing exceeds the discount, look elsewhere!
There are also hidden costs associated with the SUV trend, because SUVs are also sold with oversized tires compared to sedans. We’re talking several hundred dollars per set of mid-range tires.
In concrete terms, an SUV sells for $10,000 more on average than a sedan. And you’ll spend a fortune on gas.
Gas or electric?
Some people want to save on fuel costs by purchasing an electric vehicle. Certainly, you will save thousands of dollars a year. But if you drive less than 20,000 kilometers a year (as many retirees do), your vehicle will not cost any less than a gas-powered car until the five-year financing period is up.
Electric vehicles will be truly advantageous when their prices are similar to those of internal combustion vehicles. According to some experts, we have to wait until 2027. Today, you have to keep many models for seven years or more to save money, compared to the equivalent gasoline model.
And if you drive less than 5,000 kilometers a year, your vehicle is a real money pit, whether it’s internal combustion or electric.