Austerity is a tough word to hear and ugly as a wide-ranging economic policy, but with interest rates rising and a looming recession, it may be time to take a cold hard look in your garage.
Given the high price of owning and driving a vehicle these days, now is a good time to reverse the long-running trend toward large, heavy, expensive and gadget-stuffed vehicles. The benefits will go well beyond saving money, but money’s not a bad place to start.
The average price of a new vehicle hit an all-time high in July: $55,000, according to AutoTrader. There are many reasons for this
, including high demand and low supply, owing to parts shortages. (And when automakers do get parts, they tend to use them on higher-end vehicles.) As a result, profits at car companies are up and some executives have said that even when supply-chain issues have been resolved, they plan to keep a lid on supply to keep prices afloat.
Used-car prices have dipped slightly, but the average price was still just shy of $38,000 in July, which is 32 per cent higher than at the same time in 2021.
Not only are cars expensive, but borrowing money to buy or lease one is now more expensive too, because the Bank of Canada keeps raising interest rates to keep inflation in check.
One-quarter of new vehicles in Canada are leased, while 57 per cent are financed, said Robert Karwel, senior manager at consumer research firm J.D. Power. Of those financing a new vehicle, 55 per cent of them are borrowing the money over seven or eight years.
“In Canada, monthly payment is king,” Karwel said. Stretching out the term keeps monthly payments lower – making bigger SUVs attainable. But now, with interest rates ranging from about 5 per cent to even 8 per cent on car loans, the cost of borrowing is adding thousands of dollars to the overall vehicle price. For instance, a $40,000 loan at 5 per cent paid monthly over seven years would cost $7,490 in interest. At 8 per cent over eight years, it would cost $14,285 – or an extra $6,795 for the same vehicle.
Terms have been getting longer too. Karwel said it may not be long until we see nine-year finance terms on new cars.
Once you’ve bought the car, you’ve got to run it, and drivers aren’t getting a break there, either. Gas prices are still hovering at about $1.70 a litre after smashing through the $2 barrier this past spring.
In other words, if you’re shopping for a car, it might be a good idea to think hard about what you actually need and consider downsizing. (Small cars can be both practical and fun to drive. My own family car for the summer months is a two-door 1991 BMW 3 Series that – okay, isn’t for everyone – but easily accommodates a baby seat, stroller, two adults and our stuff. Newer compact machines aren’t the penalty boxes they once were either. The latest Honda Civic hatchback, for example, is an incredibly well-rounded automobile.)
Of course, some drivers really do need huge cars. If you have three children, you’re going to want a three-row SUV or a minivan. If you’re a contractor, a full-size pickup may be necessary.
The high costs of car ownership will hit those in the lowest tax brackets the hardest, perhaps even pushing them out of the car market entirely.
But for most other people, buying something smaller and more frugal than the burly vehicles we have become accustomed to could pay dividends.
About 80 per cent of the new-vehicle market consists of SUVs and pickups. Not only are they more expensive to buy and run, but they can be more dangerous to pedestrians in the event of a collision. Bigger vehicles are dirtier too; Canadians drive some of the largest and most-polluting vehicles in the world, on average, according to a 2019 report by the International Energy Agency. So you could save money, save on gas, help the environment (a little) and perhaps even save a pedestrian by downsizing.
When gas prices peaked earlier this year, some dealers saw an influx of people looking to sell their gas-guzzling pickups. Drivers who really needed a truck surely kept them, but drivers who bought a hulking truck as a luxury lifestyle accessory understandably went looking for more economical alternatives.
The large, heavy, powerful and gadget-packed vehicles we have grown to love are – let’s be real – overkill for the vast majority of drivers.
Nevertheless, Karwel doesn’t think high interest rates and the growing cost of cars will reverse the trend toward bigger types of vehicles and longer finance terms.
“No one’s holding a gun to consumers’ heads when they’re buying these things. Vehicles are desire-driven purchases. We want nice things, and we want them well equipped,” Karwel said. Maybe we’re hopelessly addicted to excess.
Shopping for a new car? Check out the new Globe Drive Build and Price Tool to see the latest discounts, rebates and rates on new cars, trucks and SUVs. Click here to get your price.