Do extensive research before buying your first vehicle
'Sale' is spelled out in the open hoods of used cars at a Toyota dealership on Sept. 18, 2010. (AP / Reed Saxon)
Published Friday, September 7, 2012 9:01AM EDT
TORONTO -- As Nance Faubert shops around for her first car, she is realizing how frustrating it can be to find one that fits both the needs and the budget of a recent college grad.
"I've been pricing and looking around for used vehicles, because I can't afford to buy new," says Faubert, 21, who has already been to a dozen dealerships.
"I live and work in North Bay (Ontario) so I just need something to get around since the city is widespread."
Faubert doesn't want to get pressured into buying a car that isn't going to last.
A little leg work and due diligence will alleviate the stress of shopping for your first set of wheels, and ensure you've covered all the bases before signing on the dotted line.
What to look for:
Scott Seguin, a sales consultant at Hyundai, says that assessing need over desire is an important factor in determining the vehicle that's right for you.
Questions to ask yourself while shopping should include: Do you plan to drive in the city only or will you be driving long distances? Are you carrying passengers regularly or plan to drive mostly solo?
Online sites such as carcostcanada.com, carcompass.ca and carbuyingtips.com can offer insight when doing your initial research along with a variety of tips, advice and cost comparisons.
And with rising gas prices, look for vehicles that are economical in fuel consumption.
Buying used over new costs less, but you need to be comfortable with buying a car someone's previously driven, which could potentially have skeletons in the trunk.
There's nothing wrong with getting a car "as-is", since you can find parts and repair it yourself -- or have someone you know do the job. However, if you ask a dealer to fix it up in order to pass inspection, you'll have to be prepared for a mark-up.
Faubert found a 2001 Saturn she liked as-is, and the dealer asked $700 for it, then offered to do the work necessary for certification at a cost of $3,500. All it required was a flex pipe ($100-200) e-brake cables ($50-150) and a wiper arm ($30-60), she said.
Those parts would cost less than $500, plus a mechanic's labour fees -- which aren't cheap -- if you can't do it yourself.
Do your research:
You can verify the condition and history of a used car by getting a vehicle history report online with the vehicle identification number (VIN), which is listed on the car's ownership papers.
That will give you information such as previous owners, average mileage, servicing records, past accidents, whether airbags were ever deployed, if it has suffered frame damage, and if it was ever a rental or fleet vehicle.
It will also tell you if an insurance company would deem the car a "total loss," which would indicate that repairs to the car are worth more than the market value of the vehicle.
Be sure to keep insurance in mind when you're shopping for your vehicle. There are many details that insurance companies take into consideration when deciding your rate.
For instance, a sports car will be more expensive to insure than a four-door sedan. The number of kilometres on the engine, year of the model, and city you live in since it all comes into play when getting the car insured.
Take the time to compare quotes by calling at least three insurance companies, or use online comparison sites to get the best price.
How to finance:
Whether you choose to buy new or used, how you're going to finance the purchase is crucial.
Getting approved for bank financing or a dealership loan is contingent on steady employment, credit history, and your amount of existing debt, says Scotiabank's vice-president of automotive finance, Lilliane Dubois.
"If you are a first-time buyer especially, we need to verify employment and income to determine your capacity to repay the loan," said Dubois.
"The amount and term of the loan and borrower's credit risk profile will determine the interest rate."
There are two options when using credit to pay for the vehicle. You can either get financing through the dealership, or go directly to your bank and apply for an auto loan. A bank loan carries an average interest rate between three to nine per cent based on your credit profile.
"It's the customer's choice in the end where they want to get the loan, but manufacturers will offer interesting loans at low percentages based on new car promotions," said Dubois.
If you do have good credit, buying new can present a variety of benefits, including zero per cent financing promotions for a determined number of months, as well as a manufacturer's warranty.
But remember the rule of thumb when buying new -- its value drops the moment you drive it off the lot, from the retail price to the wholesale value. And you can expect a car to lose 15 to 20 per cent of its value a year.
If financed through credit at a dealership, used cars aren't eligible for promotional rates, and loans are typically between six to nine per cent interest -- higher than what a bank may be able to offer.
There's also the option of buying certified-preowned, which comes with the same security benefits as buying new, such as dealership guarantee and extended warranties, along with a lower interest rate, notes Seguin.
"Typically new car interest rates are lower than used, but in the end the vehicle is more expensive overall."
Lower monthly payments through leasing might look attractive, but experts caution it can be the highest cost of borrowing in the market place.
That's because monthly payments are comprised of two components -- interest on the principal or cost of the vehicle, and paying down the principal.
On a loan, the paying down the principal portion can be quite steep because the buyer is paying off the entire cost of the vehicle during the financing term. On a lease, depending on the end residual value, the consumer may be only paying down half the cost of the vehicle.
That's why monthly payments are usually lower, but at the end of the lease, the consumer doesn't own the vehicle and will have paid more in interest than on a loan.