The REAL cost of Owning a Car

[MortgageQueen]

Excerpt from article in Globe and Mail- October 21st

A MONEY PIT -Cars are a problem in personal finance, but they’ve been getting a free ride.
The surge in home sales in recent years and its impact on family finances has received non-stop attention in the past couple of years. But a similar jump in car sales has mostly been treated as a business story about rising fortunes in the country’s most important manufacturing sector.


Cars are a voracious wealth destroyer – they burn both gas and money. Behind houses, they’re a top contributor to today’s high personal debt levels and inadequate saving. Thinking of jumping into what is expected to be a record year of new car buying in Canada? Back up for just a moment and reconsider.
Of course, houses are a bigger financial strain than cars. The average house price in Canada was $385,906 in September, while new cars averaged $26,755 last year. But houses are at least an appreciating asset. If you buy today, you can reasonably expect to see your home post average annual price increases at the inflation rate over the next 10 to 15 years. Cars bought today will have marginal value a decade from now compared to the purchase price.
In our rush-rush world, most families need a car or two. But there’s reason to wonder if we’re doing more car buying than is good for us.
Even General Motors of Canada president Kevin Williams is concerned about this. My colleague Greg Keenan reported him telling The Globe and Mail editorial board earlier this month that auto sales are higher than economic indicators suggest they should be.
For Mr. Williams, the issue is the sustainability of today’s high sales rates. For buyers, it’s the risk to the health of their day-to-day finances.
The length of car loans today is a particular problem. I’ve financed plenty of new vehicles over the years and never gone more than five years in term. Today, data from J.D. Power & Associates shows almost two-thirds of car buyers are financing their purchases over six to eight years.
Long-term loans keep your payments low, but they make never-ending car debt a distinct possibility. As soon as your car is paid off, you could well be looking for a new vehicle to suit your evolving needs. Some people even sell their car before their six- to eight-year loan is paid off and add the remaining principal to the cost of their next vehicle.
Judging the cost of car ownership by the amount of your monthly loan payments provides the same incomplete picture you get when assessing home affordability by looking just at mortgage payments. Among the extra costs for cars are insurance, which in my experience goes up every year well beyond the inflation rate, as well as licensing costs, maintenance and fuel. Parking is another expense, especially if you commute every day.
As with houses, cars have two ways of destabilizing your finances. One, the cost of ownership uses cash that might otherwise go toward savings. Two, you run the risk that your payments will rise as interest rates move higher and squeeze your cash flow even harder. Some car loans have a fixed rate, but others have a floating rate that will edge up once the Bank of Canada decides to stop holding borrowing costs at today’s historically low levels.
What we need are some guidelines for car affordability, just as we have for houses. Suggestion: All household car payments plus insurance should not eat up more than 6 per cent of gross household income. But for most families, it means they’ll be able to carry one car payment at a time. Financing two vehicles will be too costly.
Since we bought our first house about 20 years ago, my wife and I have worked on the principle of having one older car and one newer one. My personal guideline is to never spend more than $400 a month on car payments, which means either saving a big down payment for a new vehicle, or looking at less expensive vehicles.
Cars are part of our lifestyle, and a pillar of our economy. Most of us will own many in our lifetimes. But as with houses, there are affordability limits that many people seem to be ignoring right now. It’s time to stop giving cars a free ride.

Honda Civic LX

Insurance*:	$2,430.00
Lic./registration:	$146.16
Depreciation**:	$3,069.36
Finance expense***:	$836.64
Annual total:	$6,482.16
Amount per day:	$17.76

Toyota Camry LE

Insurance*:	$2,619.00
Lic./registration:	$146.16
Depreciation**:	$3,687.96
Finance expense***:	$1,040.88
Annual total:	$7,494.00
Amount per day:	$20.53

Chevrolet Equinox LT

Insurance*:	$2,725.68
Lic./registration:	$146.16
Depreciation**:	$4,677.12
Finance expense***:	$1,305.84
Annual total:	$8,854.80
Amount per day:	$24.26

* These insurance costs are based on typical insurance coverage for an average male driver, around the age of 45, employed with a full licence.
** Based on trade-in values after four years and 72,000 km
*** Based on 7.25% and a four-year loan

[lecale]

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[lecale]

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[Zonny]

This is a major factor in why we don't own one. Even if we did own one, it would be parked in the driveway all day, as it costs about $150+ a month to park downtown. we bought our house with bus routes in mind. I think we're rare that way, most folks aren't willing to be car free.

[walkonby]

I am in total agreement about this, which is why we have sacrificed sharing the 1 vehicle. It is also the same reason my kids could care less about learning to drive because they know they cannot possibly afford to buy or maintain their own and pay rent and all the other living expenses that come with being independent. Then I see so many of their peers where every single family member has to have their own vehicle. Yikes!

[blueeyetea]

Well, I have to say that in Ottawa here, the bus system sucks and it's only good for getting people to and from work if they work downtown. Depending on where you live in this are, having a car is almost a necessity, if only to be able to cart your groceries home. Having said that, hubby and I manage with one car, but we don't have any kids. If we did, I don't know if having just one car would cut it.

[blueeyetea]

This is a major factor in why we don't own one. Even if we did own one, it would be parked in the driveway all day, as it costs about $150+ a month to park downtown. we bought our house with bus routes in mind. I think we're rare that way, most folks aren't willing to be car free.

If towns and cities were built around making it easy for people to live car free, more people would be willing to try it. I grew up in Montreal and my parents didn't have a car until I was 7 years old. When I left home, I lived in Montreal for 5 years before moving away and never needed to own a car. To get to my point, there were services offered to non-car owners that made it easy not to own a car. Taxis are plentiful and cheap, even at 3 o'clock in the morning. In 1988, the year I moved to Ottawa, taking a taxi home from downtown Montreal cost $5, in Ottawa it was over $20. All the grocery stores in my neighborhood in Montreal offered delivery for a fee. In Ottawa, it's only offered to senior citizens on Wednesdays from 9 to 4.

Around here, except for downtown, most communities are built around the use of a car, the suburbs being the worst. Just a couple of years ago, OC Transpo revised and reduced the number of routes available in Kanata and Orleans, having people walk longer distances to catch a bus, while increasing the cost of their monthly pass. On top of that, park n rides are full by 7 am, being the last straw for people wanting to take the bus.

[kanewtz]

We live on the outskirts of town and it is a 20km one way trip to work each day for my wife(on mat leave)/I.

I do carpool to work though.

While the article is interesting....who in their right mind would spend 7.25% interest on a loan for a vehicle? That is absolutely insane!!

[snuffaluffagus]

One thing the article doesn't mention is the cost of good health when we rely on our cars to get us everywhere.

I sold my car last Spring before moving to suburban Calgary. We live about a 45 minute walk to the nearest grocery stores, 1 hour from the library, and I head out by foot at least 4-5 days a week. If my time is limited, I take my bike and it only costs me an extra 5-10 minutes more than if I were to drive. I've never felt healthier.

I don't think I'll ever be a car owner again .

[MortgageQueen]

We live on the outskirts of town and it is a 20km one way trip to work each day for my wife(on mat leave)/I.

I do carpool to work though.

While the article is interesting....who in their right mind would spend 7.25% interest on a loan for a vehicle? That is absolutely insane!!

​You better sit down Kanewtz. . . I know people that pay up to 28%. . .

[itchy54]

There is a lot to say about not owning a car, BUT...it really does depend on where you live and what you do for a living. Many towns don't have good transit systems and there are lots of jobs that require you drive. My son has one of those jobs, but they pay him to drive his car and he makes money doing that.
For employment sake I would recommend that all children of age learn to drive....I would never have gotten any of my jobs as a university student without a licence (Geology, we needed to drive the company trucks). I have a friend whose son does not drive (he is 25) and they have to drive him to work every day (yes, he still lives at home) and pick him up.....
Yes, cars are expensive but sometimes they are needed.

[walkonby]

There is a lot to say about not owning a car, BUT...it really does depend on where you live and what you do for a living. Many towns don't have good transit systems and there are lots of jobs that require you drive. My son has one of those jobs, but they pay him to drive his car and he makes money doing that.
For employment sake I would recommend that all children of age learn to drive....I would never have gotten any of my jobs as a university student without a licence (Geology, we needed to drive the company trucks). I have a friend whose son does not drive (he is 25) and they have to drive him to work every day (yes, he still lives at home) and pick him up.....
Yes, cars are expensive but sometimes they are needed.

Absolutely! Sometimes cars ARE needed, like in remote areas. However, when good public transit is readily available, and a person ( student, young adult, whatever) chooses to still pay for the convenience of driving, then they will just have to live with the expenses that go with that. No biggie to the parents I suppose, as long as they are not footing the bill for their kids choices.

[Zonny]

Absolutely! Sometimes cars ARE needed, like in remote areas. However, when good public transit is readily available, and a person ( student, young adult, whatever) chooses to still pay for the convenience of driving, then they will just have to live with the expenses that go with that. No biggie to the parents I suppose, as long as they are not footing the bill for their kids choices.

Absolutely true, I think that people should still have a drivers license. As for where you live, while I grew up in a rural area where living without a car wasn't an option (even walking to the end of the driveway would have benefited from a vehicle!), as adults where we live is up to us. My DH and I chose our house with a car-free lifestyle in mind, ensured we were on several bus routes before we decided to buy it.

[FLA]

Depreciation is half of the cost so if you buy an used one, the annual cost could be much less.

[travelgeek]

I've adapted this method for buying cars: (video) http://www.daveramsey.com/media/flas...ee/player.html

While I think they are a bit too optimistic about a 12% rate of return in the stock market as returns are never guaranteed, the idea about starting off with a good used car with cash that you can afford and then banking what you would have paid monthly payments into a future car fund is a good one.