Wheels

Duane needs new wheels. How should I finance that sweet ride, he asks?

First, the MSU: “Thanks for the awesome work on your blog. You have helped me and my family in so many ways to make it in our little corner of this great country.”

Like, ‘what term mortgage should I choose’, this is an eternal question. Unlike houses, which almost always appreciate, cars are machines that break, devalue and end up as tunafish cans. Vehicles can be sinkholes for money (not as bad as boats, but close) and most people make really bad decisions when buying a new one. Like borrowing on an 84-month term (your Bronco may not last that long).

Anyway, here’s D:

We need a new one and wondering if we should buy it cash (we have it on hand) or invest that money and finance the vehicle at 5-6% (which is the going rate)? Is there a finance rate or term that makes no sense? I don’t like the idea of leasing (renting) as I don’t own a business to apply the costs to but am open to it if you have insight I haven’t looked into.

First, let’s review rates. Car loans at the major banks start north of 7% these days. That is a huge premium over inflation (1.9%) and average wage gains (3%). And remember that you are borrowing money to put it into an asset 100% guaranteed to be worth less the weekend after you buy it. A vehicle is not an investment. It’s a tool of constantly diminishing value. (The best argument available for buying a used one – but only if you’re handy and manly, like everyone in the comments section.)

So if you bought a $50,000 vehicle with five grand down, at 7.99% over 72 months, the loan repayment would cost $65,100. Combined with the deposit, the car would set you back more than $70,000. After six years what would it be worth? Depends on the machine, mileage and condition.

Lease rates are less. These days Lexus is at 2.4%, Nissan as low as 1.4%, GM 3.9% and Toyota 2.5%.

Duane is quite right about writing off vehicle expenses if you are self-employed or use your car to make a living. In many cases where deductibility is allowed, leasing is a no-brainer. You get a new car, less hassles and a tax break.

Bur there are other advantages to renting, instead of owning, your ride. Monthly payments are lower. Deposit amounts are usually far less as well. Repair and maintenance costs are minimal, since the car is under warranty and many leases will cover routine servicing. You also know going into a lease exactly what the car will be worth at the end of the contract, which provides clarity and helps in financial planning. Then you can get a new one!

The biggest advantage is that you get to keep your cash. You can invest the money in stuff that grows in value and makes you wealthier, instead of a hunk of machinery that costs money to service, fuel and insure and always ends in a loss.

But leasing has its drawbacks, of course. There are mileage restrictions, and exceeding them can cost you more. Condition matters, so the vehicle needs to be returned on time with nothing more than ‘normal wear and tear’. No bullet holes.

Of course, you have no equity in the car. When the lease is up, you drive it back to the dealership and usually there is no dickering over what a trade-in value may be. Also if you fall on harder times, or tire of the vehicle and want to terminate early, that could result in a penalty, termination fees or a refusal to take the thing before the term is up – which means you must sublease it (subject to conditions).

So, leasing can be cheaper with lower payments and allows you to invest more in financial assets for growth. You always drive a newish car. Depreciation is no concern. Repairs are unknown. But you have to watch your usage, being aware of distance travelled and damage. You also lose the flexibility of when to return it and have zero equity.

So, Duane, buying with cash ensures you end up with less money and a used car. Taking out a long car loan makes the bank giddy. Leasing can increase your net worth. Tough choice.

About the picture: “This is Lola, she is 100% LOVE,” writes Debbie. “She is a gentle, loving soul and never had a fight with any dog.  She is pure Sunshine.  She is 5 years old and loves cooling off in the lake after a long walk.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/08/15/wheels/