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book excerpt

Buying a used car.

Reprinted by permission of the author, Chris Snyder, from Be Smart With Your Money. Copyright 2013 by Civil Sector Press. Book Excerpt. Financing A Car.

After a house, a car is often the biggest purchase many people make and often requires borrowing. Until 2008, it was quite simple to finance your car, but when credit dried up, it became more difficult. As a result, the automobile industry took a nosedive.

Leasing is the equivalent of renting. This popular option became generally unavailable as car companies stopped providing leasing as they in turn lost the money usually supplied by the banks to provide the leases. Leases are now back and banks are trying to get a share of the business. The effective interest cost on a lease is often more than just borrowing money, because the leasing company has to borrow the money, administer the lease, and make a profit. But there may still be some advantages to leasing.

For one thing, leasing may preserve your capacity to borrow from financial institutions if you ever really need to borrow. For salespeople, professionals, or self-employed persons, leasing may offer tax advantages. And if you have a bad personal credit rating, the interest rates you may have to pay for a loan could actually be higher than the rates charged by a leasing company.

If you plan to lease a car, make certain you are aware of the terms of the agreement. Look especially at the number of kilometers you can drive without paying more. Take a look at the purchasing privileges at the end of the lease. You can reduce lease payments during the lease term, but only at the cost of a higher buy-out figure at the end of the term. Make sure you know what the cancellation costs of the lease are, and what repairs may cost you when you return the car at the end of the lease.

The car industry is making it more attractive to purchase a car, and it is common to find 0 per cent to 4 per cent purchase financing on many cars and trucks. This is often a good option. Keep in mind that you can normally obtain a better deal if you finance separately, since the effective cost of the money is included in your price i.e. the cost of a car with a 0 per cent loan will cost more than paying cash. The rate will also depend on your credit rating.

Also consider buying a good second-hand car, and avoid extended warranties. While they can make you feel better, they are cash cows for the dealer. Finally, ask yourself "Do I need or want all of the bells and whistles?" in terms of options. They are often very expensive – built-in GPS systems can cost much more than one you can buy at Canadian Tire, or a GPS system may even be available on your iPad.

Paying cash for a car is usually the best way to go, but it may not be something everyone can do. If you need to borrow, one suggestion is to use your line of credit. If secured, the costs could range from 2.5 per cent to 3.5 per cent. The advantage is that you own your car and you can repay the loan over a longer period of time.

This will help keep your payments low. The interest rates on a line of credit are usually lower than so-called car loans offered by the banks.

Reprinted by permission of the author, Chris Snyder, from Be Smart With Your Money. Copyright 2013 by Civil Sector Press. Book Excerpt. Financing A Car.