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preet banerjee

Honda car

Car buying used to be simpler. With a deceleration in the depreciation curve of automobiles, a one or two year old car was a perfect balance of price and peace of mind.

There was enough of the factory warranty left to provide comfort, yet you avoided the really sharp depreciation rates of the car's early life. In other words, you saved a lot of money by buying slightly used without sacrificing too much of the car's best years.

More often than not, that holds true if you don't need to finance the vehicle. But that's a big "if."

For the many Canadians who will be financing their next vehicle, the game has changed. When you factor in the incentives and vehicle financing rates now available on new cars, it's possible to find situations where the monthly payments and the lifetime principal plus interest costs over equal terms are lower for new cars.

This might explain why we are seeing record new car sales north and south of the border.

Edmunds.com compiled this chart of various makes and models in the U.S. that showed the monthly payments for new cars with new car financing rates versus slightly used cars with used car financing rates. The third column shows the relative cost advantage over a five-year term. In many cases, used cars were cheaper, but often by less than $1,000. Many people would happily swallow that difference if it meant knowing someone else didn't take your new baby to the red-line on their daily commute.

Here in Canada, Honda currently offers a financing rate of 5.24 per cent for 72 month terms on certified pre-owned cars. But select new cars can be financed at a rate of 0.99 per cent. For an identical monthly payment, that interest rate differential translates into a few thousand dollars of difference on the ultimate purchase price.

The spread between new and used car prices is narrower for certified pre-owned cars. People are willing to pay for that certification. If you tend to fall closer to the "newer and more likely to be reliable" end of the spectrum, you might find that buying brand new is the best choice financially, not to mention psychologically.

If you're handy with a car, keep well on top of maintenance and drive smoothly, the traditionally higher rates of used vehicle financing are eventually offset by the depreciation in price. Of course, as the price depreciation curve flattens out, the maintenance cost curve accelerates.

Yes, there are a lot of moving parts when considering car costs. But as interest rates are relatively low for both the new and used markets, it's odd to see amortizations increase. Seven and eight year loans are not abnormal.

The best advice when shopping for your next vehicle is to consider looking at vehicles you don't have to finance at all. Among other benefits, it certainly makes it easier to comparison shop.

There's no rule that says you have to spend one year's income on a car. But maybe there should be a rule that says you shouldn't.

Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network and author of the new book, Stop Over-Thinking Your Money!